Objective
Construct and continuously monitor and upgrade portfolios for clients which best meet their investment objectives after considering their particular needs and constraints, the risk and return associated with alternative asset allocations, and the relative attractiveness of the financial markets at the time
- Avoid major market timing bets
- Diversify portfolios as to issuer and industry
- Client Considerations
- Time horizon
- Risk tolerance
- Income needs
- Tax status
Relative Attractiveness of Financial Markets
The Stock and Bond Markets are measured by:
The current stage of the business cycle:
Source: https://www.britannica.com/money/stages-of-economic-cycle
- Financial ratios based on fundamentals, and valuation
- Stock yields / bond yields
- Inflation expectations
- Required returns
Putting It All Together
The end result of a careful analysis of client considerations, alternative asset allocations, and the relative attractiveness of financial markets is a portfolio designed for a specific client, within the framework of our investment outlook.
KEEPING ON TRACK
Asset Ranges
Each account type has a percentage invested in three categories: Equities, fixed income, and cash. For example: equities 40-60%, fixed income 40-60%, and cash 0-20%.
Adjusting the Asset Mix
The asset mix is adjusted from time to time, within its determined ranges, as described below. Generally, asset mixed will not be changed in increments of less than 5%.
Asset Allocation Model
We continuously monitor the absolute and relative attractiveness of the equity and fixed income markets using our Asset Allocation Model in conjunction with fundamental analysis of economic and financial trends and other considerations.
Re-balancing
An account should normally be re-balanced when market action, cash flows, maturities, etc., take the mix more than 10% off in any category.
Positions should normally be added to when they fall to 67%-80% of a “normal” (usually equal dollar weight) position, and trimmed back when they reach 125%-150% of a “normal” position.
Sell Discipline
A successful investment philosophy must contain a sell discipline. Our valuation model ranks our investment universe by the equity’s expected price change in relation to the S&P 500.
Changes in the company’s fundamentals, expectations or share price may result in a change to the company’s ranking. If the ranking declines into the lower third of our universe, the equity is reviewed as a potential sale candidate.
Overview of fixed income investing
An investor holds fixed income securities for one of two reasons:
- to generate current income or
- to dampen overall portfolio volatility, rather than maximize investment returns.
Other asset classes such as equities have provided far superior absolute rates of returns over virtually any historical period, but with greater risk as demonstrated by the standard deviation of returns. Nonetheless, fixed income investors who ignore the various risk factors in the market do so at their peril.