Our Approach
Wealth Management and Consulting
Our approach to wealth management and consulting is based on the following principles:
Targeted Allocation Range
Develop a target allocation range for each asset class, type of risk, manager, and investment type, that, when viewed in the context of historical performance and current market valuations, is consistent with the client’s mandated performance and volatility objectives.
Robustness
Find an allocation that will perform reasonably well under many different conditions, not the one that performs the best under the most likely set of conditions.
Low Correlation with U.S. Equities
About 90% of portfolio risk is determined by the degree of correlation with home market equities. By tilting their strategic allocations away from traditional asset classes (U.S. stocks and bonds) toward a more balanced portfolio, clients can improve their portfolio’s risk/return tradeoff. We try to include – where we can – private equity, hedge funds, international stocks, real estate and commodities. These core alpha asset classes act as diversifiers to increase expected return as well as reduce risk.
Display of Terminal Wealth Risk
Use advanced analysis to help clients determine how their current asset allocation may affect long-term wealth accumulation and the likely achievement of financial objectives. This analysis takes into account client specific tax rates, cash flow, liquidity needs, as well as stochastic return inputs. We use proven Monte-Carlo simulation techniques to estimate whole distributions of future wealth levels associated with initial asset mixes. To accomplish this, we randomly sample values from estimated distributions for the uncertain variables (asset class returns).
Fundamental Indexing
In the passively managed part of the portfolio, use fundamentally weighted or unweighted index funds, as well as capitalization-weighted indices where possible.
Social Awareness
Be well informed about socially aware investment opportunities.
Loss Harvesting
In taxable accounts, have the sub-portfolio managed to closely track an index but at the same time enhance after-tax return through systematic tax loss selling.
Active Combined with Passive Management
Use a core/satellite structure in certain taxable accounts. This is the combination of a large diversified portfolio managed with a tax-sensitive strategy plus one or more concentrated and actively managed portfolios.
Avoidance of Fads
Do not chase performance. Be aware that when asset class or manager style valuations start out high, they subsequently fall (i.e., revert to the mean).
Conviction, Expertise and Definable Competitive Edge
Select active managers within an asset class who have a compelling investment philosophy, are innovative due to a deep knowledge of company fundamentals, have a limited number of holdings, and who follow a disciplined repeatable process for achieving their objectives.
Minimize Manager Risk
Conduct ongoing due diligence and monitoring and perform intensive qualitative and quantitative analysis.
Direct Management
The main principle governing direct equity management (which we are limiting to only a few accounts) is to invest at prices below our estimate of intrinsic value in businesses with the following characteristics:
- Substantial free cash flow generation.
- A strong management team that allocates capital well, has a consistent operating history and whose interests are aligned with shareholders.
- An outstanding franchise with pricing power, substantial and/or market share, recurring revenue streams and high return on invested capital.
- A favorable long-term outlook, including predictable growth, long product life cycles and favorable demographic trends.
- Long-term structural and competitive advantage.
- Market capitalization in excess of $1 billion.
We believe that we can buy these outstanding businesses at a substantial discount to their long-term value. In our opinion, investing in this way over long periods of time ties the client’s return opportunities to the performance of a select group of businesses with outstanding characteristics.
In the fixed income area, we have the following objectives:
- To enhance portfolio value in a declining interest rate environment
- To protect principal in a rising interest rate environment
- To provide income commensurate to each individual client’s needs
- To provide each client with a reduced risk profile
- Monitored risks include credit risk, interest rate (price) risk, sector risk, reinvestment (call) risk
The decision criteria involved include a thorough analysis of interest rate direction, coupon selection, yield curve positioning (maturity management), and sector selection (yield spread analysis).
We employ the following strategies as a part of our process:
- Yield spread analysis
- Index benchmarking
- Maturity management
- Bullet strategy
- Barbell strategy
- Ladder strategy
Municipal Bond management is an area of particular emphasis. The muni market is an extremely inefficient market with more than 50,000 issuers and many different credit and pricing structures. Astute municipal bond dealers can uncover value in pre-refunded, escrowed to maturity, insured paper, and other areas of the market. We have added alpha by focusing on high quality, smaller issues with an illiquidity discount and a pricing reality that may not be uncovered by larger firms.
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