Clearly Defined Philosophy + Disciplined and Consistent Process
It's critically important for investment decisions to be made within the framework of a clearly defined investment philosophy, using a process that is highly disciplined and consistently applied. We approach investments through asset allocation that is based on principles of an academic theory called Modern Portfolio Theory. It was developed several decades ago by a Nobel Laureate and has gone through incremental refinements over time. We build our portfolios based on risk tolerances and expected return objectives, and select an appropriate asset allocation for each client.
Asset allocation has been identified as a primary factor in explaining return variation in investment portfolios. Academic studies have found that a large percentage of portfolio return variance can be attributed to asset allocation decisions. Market timing and actual security selection were shown to have contributed to it to a much lesser degree. Below are several primary elements that we consider in designing portfolios.
Asset Class Returns
Long-term historical risk and return statistics help us evaluate and understand return patterns over extended cycles. This allows greater predictability on how each asset should contribute to overall portfolio return.
Asset Class Volatility
Understanding volatility characteristics of each asset class is critical, as performance and risk are closely linked. Over the long term, it generally holds true that the higher the return, the higher the risk.
Asset Class Correlations
Measuring relationships between asset classes is a crucial element in portfolio building. Combining different asset classes with low correlations should reduce overall risk over time—a key tenet of diversification.
“There are two kinds of investors: those who don't know where the market is headed, and those who don't know that they don't know.”
William Bernstein, author of The Intelligent Asset Allocator
Our asset allocation models put to use a variety of asset classes, and comprise risk profiles from conservative to aggressive.
Our asset allocation models are designed to optimize the trade-off between risk and reward. We methodically oversee a routine, rigorous and structured evaluation process of all asset allocation models. These findings and any recommendations are then reviewed and considered by the Investment Policy Committee for implementation.
A key focus is providing diversification by taking advantage of asset classes with low levels of return correlation to each other. This helps mitigate portfolio volatility, adding potential for better long-term risk reduction. Asset classes we use are: U.S. large-, mid- and small-cap stocks, U.S. government and corporate bonds, foreign stocks and bonds, real estate and commodities.
Asset class and style undervaluation, fair valuation or overvaluation are determined though analysis of current macroeconomic and financial data. Then, we attempt to tactically capitalize on discrepancies by adjusting weights between those offering best and worst perceived value and potential for return.
Result: Diversified, Efficient Portfolio