Our Approach to Portfolio Management
We use Modern Portfolio Management tools to perform investment analysis, portfolio design, and performance evaluation. These tools allow us to evaluate and measure quantitatively the relationship between risk and investment return. As a result, we are able to examine and design portfolios on risk-reward parameters and on the quantification of portfolio objectives.
Our Approach to Asset Allocation
Asset allocation is the process of selecting a mix of asset classes and determining the efficient allocation of capital to those assets by matching rates of return to a measurable tolerance for risk. It is no longer a one-dimensional process of selecting the right stock, bond or property to place in a portfolio.
Modern portfolio theory is based upon four basic premises.
- Investors are inherently risk-averse. Investors are not willing to accept risk except where the level of returns generated will fairly compensate for that risk. It is probably reasonable to assume that investors are more concerned with risk than they are with rewards. The problem in the past has been the measure of risk and its relation to return.
- Markets are basically efficient. With the advance of information technology and more sophisticated investors, the markets are likely to become even more efficient.
- Attention should be shifted away from individual securities selection to consideration of portfolios as a whole based on risk-reward parameters and on the identification of portfolio objectives. In a study conducted by three leading financial analysts, it was determined that, on average, 93.7% of the variability in the risk and returns of a portfolio could be explained by the portfolio's asset allocation. These studies have supported the concept that asset allocation is the main determinant of portfolio performance, with market timing and security selection playing minor roles.
- For any level of risk that one is willing to accept, there is a rate of return that should be achieved. Quantitative methods are now used for measuring risk and diversification, making it possible to create efficient and theoretically optimal portfolios. The number of assets in the portfolio is less important than the relationship of those assets. Therefore, having many assets in a portfolio will not reduce the risk in the portfolio as much as having negatively correlated assets.
We use a form of asset allocation called Tactical Asset Allocation. This approach attempts to improve portfolio performance by making small "mid-course" adjustments to the agreed upon long-term strategy based upon changes in market environment. Along those lines, we recognize that developing successful investment strategies depends on our ability to use sophisticated analytical techniques. To provide the services that our clients require today, we utilize systems which include all of the computer models and programs required to develop and manage your portfolio in a sophisticated asset allocation program.
Please be aware that diversification and asset allocation strategies do not assure a profit and do not protect against loss in declining markets.
