Our investment management approach is to construct a globally diversified portfolio consisting of equities, fixed income and cash. Equities provide growth and protect against rising inflation. Fixed income is used to preserve existing wealth and to generate income. Cash can be used for safety or opportunistically as market conditions warrant.
We are primarily a large cap equity manager, although we do utilize a combination of both active and passive mutual funds and exchange traded funds (ETF’s) to enhance diversification. In addition to the large cap stock portfolio, we allocate to other asset classes like mid cap, small cap and international (both developed and emerging markets). The investment style we employ is a blend between growth and value and we will tilt portfolios toward either style depending upon which may look most attractive at the time.
Our fixed income portfolios are designed to minimize the risk that comes from changes in inflation and interest rates. We accomplish this through building bond ladders that produce consistent income streams and spread bond maturities across the yield curve. We are very sensitive to duration and expectations in interest rates and look to select bonds to seize opportunities in the yield curve. Based on a client’s tax situation, we can purchase municipals, treasuries, government agencies, mortgage-backed and asset-backed securities.
Our goal is to maximize risk-adjusted returns for a given level of risk. One way we accomplish this is by being as cost efficient as possible. ETF’s and index mutual funds are a very inexpensive way to broaden exposure into various areas of the market. On the other hand, there are times we will pay for active management but only if that manager can consistently beat its benchmark and offer enhanced returns.
The analysis begins with a determination as to where we are in the overall market cycle. We analyze economic data like GDP, interest rates, inflation, retail sales, housing starts and unemployment to help provide a guide and framework for investing. The economic backdrop helps us determine the appropriate asset allocation mix among stocks, bonds and cash. We will then look at the relationship among the three classes, trying to determine which investment type is cheap or expensive relative to the others.
We then move “down” to the various equity asset classes: small, mid and large as well as the foreign markets. We put each component into growth and value styles to look at the valuations versus each other. This helps us in determining which part of the markets are expensive or cheap and provide the foundation of the asset allocation between size and style. As part of this analysis we inherently believe that markets tend to be trending markets – one asset class will dominate another for a certain period of time before switching. As an example, passive investments tend to do better in a trending market, whereas active managers tend to outperform in a volatile environment. This does not mean we are trying to time the market or investments, but rather moving with existing market trends.
It is at this point we put together either the ETF / mutual fund portfolio or continue to use individual equities. Portfolio size is the main determinant of whether we use stocks or mutual funds. For an individual stock portfolio we prefer to see a minimum of $250,000 committed to individual stock purchase – amounts below that threshold will be put into an ETF / mutual fund portfolio.