Our approach to investment management begins by first being familiar with, and evaluating, the world's leading investment managers and their strategies. We are an institutional client of some of the world’s leading investment firms, including J.P. Morgan, Russell Investments, Goldman Sachs, BlackRock, Fidelity Investments, and others to a lesser extent. We utilize these firms for both their investment expertise and their economic views. The knowledge we get by using a variety of leading firms gives us a unique perspective that we can utilize to our client’s benefit. This perspective is particularly valuable when combined with our firm’s long history and long-term relationships with these firms.
We take a global, "best-of-breed" approach to portfolio construction using products (i.e. mutual funds, ETFs, etc.) selected because of their ability to fit a specific role in our portfolio design. Our process would be categorized as Global Multi-Asset and has been developed over nearly three decades, it is rigorous, ongoing, and has ultimately been effective. Over 20 years ago we trademarked the name of our process:
Asset Allocation
Portfolio construction starts with establishing an appropriate asset allocation target. Asset Allocation is the process of determining what asset classes like Stocks (i.e. Large Cap US, Small Cap US, Non-US Developed Markets, Non-US Emerging Markets), Bonds (i.e. Core US Aggregate, High Yield, Emerging Markets), and other asset classes like Real Estate and Commodities to include in the portfolio. Each asset class has characteristics like its correlation to other asset classes, expected return over various time periods, and its range of volatility over those same time periods. The chart below illustrates various annual asset class returns from 2005-2019.
Efficient Frontier
The next step in developing an asset allocation target is determining what mix (% proportion) of each asset class to include. There is a concept in Modern Portfolio Theory called the “efficient frontier” which is a term used to describe a line on a chart representing various asset allocation mixes that are the highest rate of return for that given level of risk. In other words, for the risk (volatility) taken on, that asset allocation is estimated to have the highest return. The risk / return trade-off is the investors decision. We want to make sure that our model and custom portfolios avoid uncompensated risk. The chart below illustrates stock and bond asset allocation efficient frontier lines for the year 2008, 2020, and an adjusted mid-year 2020 taking into consideration the Covid-19 market and economic impact.
Investment Objectives
The next step in the process is to determine what the objectives are for the portfolio(s).
What is the purpose of the portfolio?
What are you trying to accomplish?
When will you need the money?
How much risk (volatility) are you willing to take to achieve your objectives?
Is this a taxable account? Or is it tax deferred?
Asset allocation has historically been one of the primary drivers of a portfolio’s performance and risk. Answering these questions will determine how to properly allocate across asset classes and help clients achieve their goals.
Portfolio Construction / Selection
Once we have established an asset allocation risk profile and determined the portfolio objectives, we can go to the next step of building a custom portfolio or selecting one of the model portfolios we have designed. In many cases one of our designed model portfolios can meet most clients needs.
For custom portfolios we would begin with the selected asset allocation, create a template and using the amount to be invested determine how much (% and dollars) of each asset class we would need to select. Custom portfolios are appropriate when there are unique circumstances in the portfolio (i.e. existing holdings, stocks not to be sold, etc.). After taking these circumstances into consideration we would select mutual funds and ETF’s to complete the portfolio template and measure and compare the expected return and risk to the target asset allocation.
Rebalancing and Reporting
Once we have a portfolio selected, or designed, and we have implemented the transactions to get invested we review the portfolio periodically to rebalance. Rebalancing is making small targeted sales and purchases of portfolio assets to meet the rebalancing policy set for the portfolio. The policy is determined when the portfolio is designed and it establishes criteria to determine when to make adjustments to the portfolio to keep its allocation on the selected course. Here is an example, US Equity is allocated at 55%, we might have a rebalancing tolerance range of + or – 7%. So when the US Equity sleeve of the portfolio exceeds 62% (55%+7%) then trades are done to bring it back to its target.
Clients receive monthly statements directly from the custodian. We prepare a more detailed report quarterly which measures investment performance and compares against various indices and selected benchmarks.