The Investment Management Process
Beginning with the absolutely fundamental belief that people come to us to help either manage and/or preserve their wealth, our job becomes to deliver performance while mitigating portfolio risk.
The process we follow is:
- Identify Goals: We start with an in-depth discovery process to discuss and establish your investment goals, objectives, time horizon, income requirements and risk tolerance.
- Providing Asset Allocation: Our investment methodology is based on the premise that markets tend to favor different asset classes at different times. Further, while we recognize that top performing asset classes cannot be known in advance, we do believe that trends can be identified as they develop. We tend to allocate assets to those asset classes and sectors that are showing greater relative strength than the broader market.
- Selecting Investment Advisors or Products: As we primarily work with institutions and high net-worth Individuals with complex financial situations, the solution changes based on the needs of each investor. Our goal generally, is to build a model that mitigates the guesswork involved, whether it be from the analysts or various managers. We tend to utilize an active indexing approach blended with our proprietary investment strategy. We are very confident in our strategies and are constantly researching new methodologies to stay ahead of the curve.
- Monitoring Client Performance: We monitor the performance and the stability of the individual investments as part of our due diligence process. Clients are at this point given quarterly performance review with forward looking strategic advice for their portfolios.
It is important to note that trend following, diversification, and asset allocation do not assure a profit or protect against a loss.
In 1954, economist Harry Markowitz won a Nobel prize for his research in this field and the concept has been a cornerstone of Modern Portfolio Theory ever since. In short, asset allocation is a method used to help meet investor needs while at the same time attempting to manage risk by spreading investments across various asset classes. This method is based on the premise that the market tends to favor different asset classes at different times and that the top performing asset class cannot be known in advance. We believe that there are significant weaknesses in Modern Portfolio Theory and traditional asset allocation methodologies.
We believe the two most significant problems with Modern Portfolio Theory are:
- Not having a sell discipline. Some advisors tend to rely on the model and positions are generally sold in response to client calls, only after substantial losses are incurred.
- It typically does not mitigate losses during highly correlated market periods. Down markets tend to be more highly correlated than up markets.
We feel the combination of not having a sell discipline and failure to mitigate risk in highly correlated markets can cost the investor their confidence in both the markets and their investment strategy… eventually they may be unable to maintain discipline.
Our asset allocation models tend to follow a “Core-then-Explore” methodology, blending both active management with indexing strategies. The “core” of our strategy is designed to be the core holding for both institutional and high net-worth investors benchmarked to the S&P 500. It focuses on participating in upside trends, while attempting to minimize downside risks. We believe the risk profile of our strategy answers the deficiencies present in modern portfolio theory.
Other key methods of delivering performance and mitigating risks are: risk budgeting and through the use of our performance driver. It is important to note that diversification and asset allocation does not assure a profit or protect against a loss.
When managing assets for our clients, we tend to treat them as mini-institutions. Exchange Traded Funds have been used in the institutional arena for many years. Today many, if not most, institutions and large pension plans utilize a combination of both index strategies and active management. This investment strategy is often driven by what many refer to as “Active Risk Budgeting”. Simply, the active risk budget is a measure of how much risk the investor is willing to assume when attempting to implement their asset allocation plan.
Our “Core-then-Explore” methodology blends both active management (A trend following core portfolio) with indexing strategies in an attempt to help achieve a more consistent portfolio tracking to the various asset class benchmarks than one might normally achieve with pure active management strategies. Additionally, this method helps us to control management costs for the greater portion of our client’s portfolio. The real goal is to contain the risk of the active manager being “wrong” over various time periods.
The Performance Driver
How Others Invest
To put things in proper perspective, it's important to know how others invest. We believe that most investment decisions made on Wall Street are based on a company's past performance. This of course seems odd in light of the fact that the most common disclosure is “past performance is not indicative of future results” We in fact, agree with this disclosure and assent to its logic.
The real point is that when making investment decisions, there is nothing more important than information- accurate, untainted, unbiased information.
How We Invest
The driver of our asset allocation models is a proprietary trading strategy primarily influenced by specific insider purchases. Knowing that accurate information is of paramount importance when selecting stocks to buy, our initial screen for equity selection is that we require an open market purchase of significance to be made by the specific officers of the company we're analyzing.
An Insider, by definition is "a person or entity who is presumed by law to be privy to non-public information about the internal operations and plans of a corporation. An insider is usually an officer or director of a corporation, but may also be an advisor, broker, or a beneficial owner of 10% or more of a class of a corporation's stock. Insiders are required to report to the SEC, when they buy or sell their company's stock or options."
We're particularly interested in purchases made by corporate Chief Financial Officers made on the open market at market price. (Please note: All information is obtained and used legally)
We believe that no one knows more about the financial health of a company than its Chief Financial Officer. The insiders we follow know in general:
- Accounts Payable/Receivable
- Reality of the Balance Sheet
- Potential Mergers and Acquisitions
- Future Changes in Corporate Strategy
- Potential benefits or harm from Micro/Macro changes in the economy
- When their company represents a value
Most importantly, they are responsible for sales forecasting on a quarterly basis for the CEO. Their "guess" should be a much better guess than an outside analyst. As mentioned previously, our initial screen requires an open market purchase to be made by Chief Financial Officers. There's certainly something to be said about paying more attention to what people do, than to what they say. Only after the open market purchase is made, will we begin to look at the company's fundamentals to determine if it will be added to our client portfolios.
This strategy serves as the driver to our client portfolios and is an all-cap, non-sector specific dynamically allocated portfolio. Although no strategy offers a guarantee or assurance of profit or loss avoidance, this strategy serves as the core for the greater majority of our client portfolios, therefore indicating our belief in our system.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.Advisory programs are not designed for excessively traded or inactive accounts and are not appropriate for all investors.