Philosophy
ValuePlus combines a long-term strategic approach to asset allocation with investment discipline, which we believe offers the best opportunity to achieve long-term wealth objectives.
Investors benefit from the implied investment discipline of a more strategic asset allocation approach, since it helps to minimize the very real temptation to follow current “hot” trends or investment fads.
We continuously evaluate our strategic allocation assumptions as long-term secular shifts in the marketplace occur, and we will make periodic changes accordingly but will not engage in market timing.
Our portfolios are personalized for each investor through customized asset allocation, diversification and goals-based investment planning.
Our open platform gives us the ability to select mutual funds and/or managers on a “best of strategies” basis, where the only criteria are performance and “fit” within the overall portfolio.
We use sophisticated optimization and allocation models in an attempt to create portfolios that consistently deliver the lowest level of risk for a desired expected rate of return.
Asset Allocation
Our asset allocation model incorporates many, but not all asset classes. The expected returns for both equities and fixed income asset classes are generated using the “Building Blocks” methodology. This method forecasts long-term expected returns by adding historical risk premiums to risk free interest rates. Expected risk of a given asset class is measured by the standard deviation of that asset class. Standard deviation measures how volatile historical returns have been over the lifetime of an asset class. We use the longest available historical time periods to determine this measure of expected risk. The assumptions are based on looking at long time horizons. We model multiple separate asset classes in order to determine an “efficient frontier” of possible portfolios. These include equity and fixed income classes, domestic as well as international.
ValuePlus Returns
Building Blocks assumes that the relationship between assets is effectively mean reverting and that over time, the relationship will return to something near the historical average. Ibbotson Associates®, a leading academic and industry practitioner, uses this methodology to forecast long-term expected returns by adding historical risk premiums to current long-term risk-free interest rates.
Optimizing
Investment portfolios are analyzed along two dimensions, efficiency and adequacy. Efficient portfolios lie on the efficient frontier – that line containing all portfolios that have the maximum expected return for every possible level of risk.
Portfolio optimization, therefore, is simply an analysis of whether an alternative asset mix could generate an equal level of return for a lesser degree of risk. Alternatively, efficiency seeks to determine if expected returns can be increased without incurring additional risk.
The Efficient Frontier Chart is derived from the Asset Allocation Recommendation. The Efficient Frontier is that set of all portfolios with the highest expected return for any given level of risk. Estimated Returns and Statistics are based on long-term forecasts using proxy market indices.
There are literally an infinite number of efficient portfolios.
Based on our understanding of the client’s investment objectives, risk tolerance and time horizon, we choose a portfolio that we believe meets the investor’s goals.
Risk
The expected risk of an asset class can be thought of as a measurement of the uncertainty of actually generating the expected return of that asset class, and is measured by how volatile the historical return of the asset class has been over its lifetime.
In the methods that we employ, the basic assumption is that the relationship between asset classes is consistent over a long period of time.
We assume that stocks will out-perform bonds by some premium; small capitalization stocks will outperform larger stocks, and other similar relationships.
The danger in any methodology of forecasting returns is that the fundamental assumptions are incorrect.
Should the nature of the capital markets change, these assumptions may not be valid. In addition, this strategy does not assure a profit or gaurantee against a loss.
Rebalance
Our analysis of the research in this area leads us to believe that market timing does not pay off for the investor in the long term.
We systematically review the portfolio to ensure consistency with the agreed-upon strategic asset allocation. We are mindful of taxes and transaction costs therefore we do not automatically rebalance over specific time periods (e.g., annually), but rather only when necessary.
Rebalancing is usually triggered by significant over- or under-performance in specific asset classes or because of cash inflows to or outflows from the portfolio, as well as changes in client objectives.
We typically do not engage in “dynamic” or “tactical” rebalancing, which we believe may lead to an attempt to time the markets.
Reporting
We provide state of the art performance reporting that sets us apart from our competitors. We compare the previously completed Wealth Accumulation Plan and it’s resulting Investment Policy Statement to the client’s current financial path to make sure that we stay focused on reaching the stated objectives.
The Portfolio report drills down from the performance of the overall portfolio to the performance of each asset class, to the performance of each manager/mutual fund.
Performance of the overall portfolio is measured against a customized benchmark and each manager/fund is measured against their appropriate benchmark and evaluated against a peer group of managers.
The portfolio is measured against the Investment Policy Statement so necessary adjustments can be made when appropriate.