Investment Management

Investment Process and Selection

We recognize that our clients want to sleep at night. We also know that they want their investments to increase in value.  Our purpose in managing money for clients is to help them meet their goals within the appropriate time periods consistent with the degree of risk that our clients are willing to take.  There are 3 main objectives; goals, time period and risk that become the fabric that forms a personalized benchmark for clients.  While we help to build an offense and defense in portfolios, the number one great secret for success in long term investing is to avoid serious losses.  We don’t speculate or gamble with our client’s money.  We avoid chasing the fickle hot sectors of the market because short term decisions have long range consequences.  We don’t trust the emotions of the moment.  While the client makes the final decisions, it is our job to give the input required to enable them to make the best decisions.

We use mutual funds as our main source of investing because of the instant diversification and liquidity they provide.  We also like the fact that the funds provide us with access to different managers to provide the degree of diversification we think is appropriate.  It is also important to note that we are able to access load (commissionable) funds at net asset value (without the commission).  It is the overall allocation to various asset classes that ultimately determines the long term performance of the client’s portfolios.  The individual securities/mutual funds are very important but are only effective when properly matched with the overall investment policy and strategy.

While we have no way of knowing what the market is going to do in the future it is generally prudent to allocate portfolios with enough diversification so as to try to limit losses and still try to obtain good returns if there are favorable market conditions.  We envision building a portfolio of core mutual funds with possibly a small percentage invested in a sector from time to time.  It is understood that we do not time the market or overweight a portfolio with the next “hot” sector and therefore inappropriately elevate the risk in portfolios.

Our approach in constructing portfolios is to use core managers that will hopefully provide consistent returns thru various market cycles and not get caught up in the next “euphoria”.   We look for managers that tend to follow the investment philosophy of Benjamin Graham.  Ben Graham is known as the father of value investing. Value, or "defensive," investors quietly seek out bargains among under-priced companies, buy into them at their intrinsic value, and then patiently wait for their fair value to be realized. These types of companies tend to be less volatile in down markets.

And since we can’t control the market, the best way to control risk in a portfolio is through an effective allocation strategy, which leads to diversification.  Asset allocation is the discipline of investing certain percentages of the portfolio, within a group asset classes. The broadest categories of asset classes are: stocks, bonds, cash, real estate and commodities.  While we want to make money in each asset class we select, we cannot predict when one or more might suffer a loss before we can make an adjustment.  Hopefully, not all asset classes go down at the same time.  This is a key assumption underlying this strategy of controlling risk while achieving acceptable returns. 

As mentioned above, the investment process includes an allocation to the various categories of mutual funds.  The process emphasizes the critical importance of each fund manager.  Each manager has a distinct investment philosophy.  Most can be identified as focusing on value or growth styles, or a blend of the two.  They also specialize in investing in large, medium or small companies.  Mutual fund managers are expected to meet or exceed the benchmark performance (as defined by Morningstar) for their respective asset classifications.

We constantly screen managers for performance and investment philosophy.  The top managers in every category are identified and utilized to build the portfolio.

We may suggest changing funds from time to time.  The reason for a change may include, but are not limited to the following:

·          Criteria within a fund itself that management can control:

·          Size:  e.g., going from $1 billion to $5 billion

·          Style: e.g., value, growth, small, large, etc.

·          Stock Selection

·          Stability of Management: e.g., manager change

·          Score: e.g., performance record

·          The character and integrity of the company and mutual fund managers.  So far our due diligence has helped us avoid any companies or managers caught up in illegal or unethical practices.  We will do our best to maintain this record.

·          Criteria outside a fund which is beyond the control or influence of management:

·          A change in the allocation strategy, e.g. assigning a higher percentage to bond funds and a lower percentage to stock funds

·          Global: e.g., Asia, Russia, etc.

·          Economic: e.g., low interest, low inflation, etc.

·          Political Intervention: e.g., new tax laws

·          Client’s goals have changed

At least once a year, we will look at the advisability of rebalancing client’s portfolios.  That means if a portion of the portfolio gets out of balance because it has performed better than the other portions it may be smart to sell some of it and put the money in an under-performing portion of the portfolio.  This discipline often results in selling at a higher price and buying at a lower price.  While it helps control risk, it could also reduce returns, at least temporarily.  At other times, it could also increase returns.  While we are sensitive to the possibility of re-balancing we do not automatically do it without assessing the overall situation.

The best benchmark for a client’s portfolio is a how it satisfies their personal needs in respect to their goals and risk tolerance.  The common mistake is to tie it to the S&P.  If we were to use the S&P 500, we would have to invest solely in equities which will increase a client’s risk substantially.  Clients portfolio’s consists of many benchmarks combined.  This may include the S&P, Lehman Brothers Aggregate Bond, NASDAQ Composite just to name a few.

Summing up, it pays to be diversified.  We have no way of accurately predicting where the markets are going; Up, down, or sideways.  We just take more comfort and confidence in choosing good fund managers that will help soften the consequence should markets unexpectedly turn downward.