Rick Welch: Dollars and $ense

Multi-Asset Strategies

The core investing philosophy of our firm is a multi-asset approach which seeks to provide multi-level diversification and exposure to four different asset classes – cash, equities, fixed income and alternative investments. We believe that the best way to achieve optimal investment performance outcomes is when a multi-asset approach is combined with strategic asset allocation, inquisitive security and fund selection and dynamic portfolio management. To accomplish this goal requires a comprehensive understanding of asset classes, regions, sectors, industries and alternative investments across the multi-asset investment universe. Our selected equity assets are differentiated by size (large, mid and small cap), sector (financials, health care and technology are examples) and geography (US, international and emerging markets). Our selected fixed income assets (individual bonds and bond funds) provide exposure to different securities based on their duration (short, intermediate and long term), credit (investment grade, government and high yield) and geography (US and international). Within the alternative investment category our asset allocation models provide core exposure to REITs and, then to a smaller degree, investments in MLPs, commodities and managed futures. The justification for alternative investments is that they have expected returns that have low correlation with the expected returns of stocks and bonds and, thus, provide the potential to increase diversification within a portfolio of assets. Alternative investments comprise about 5% of portfolio assets, similar to our portfolio target of 5% in cash holdings.

Our multi-asset strategy platform has five different asset allocation models, each of which are differentiated by investor risk profile. For risk-adverse investors we employ our Conservative Asset Allocation (20/80 which means 20% equities and 80% fixed income and cash). Our three “middle” allocations include Moderate Conservative (40/60), Moderate (60/40) and Moderate Aggressive (80/20). Our Aggressive Asset Allocation (95/5) provides exposure to our broadest list of approved equity selections and the requisite 5% target in cash holdings. While choosing the right strategic asset allocation plan is essential, so is the ability to make tactical investment decisions and moves dependent on market conditions. A sound multi-asset approach allows for adjustment of the composition of the portfolio over time, increasing exposure to those assets most likely to outperform in the prevailing market conditions. This adjustment or tactical asset repositioning shifts the portfolio asset allocation and underlying equity exposure to reflect the most appropriate mix for any given point in the economic cycle.

What most investors do not understand is how their strategic asset allocation plan impacts investment returns over the long term. It may surprise some readers to learn that a conservative portfolio may return, on average, +5.1% per year while the aggressive portfolio may return only slightly more at +6.8% per annum. The real difference in returns (based on 40-year historical return data) is that the conservative investor may see a one year high return of +15.8% and one year low return of -4.6%. Alternatively, the aggressive investor may see an impressive one year high of +39.9% and a disappointing, head scratching one year low return of -36.0%. Thus, what a strategic asset allocation plan provides is an investor appropriate, risk-adjusted investment portfolio that is constructed to smooth out expected returns by lowering the probability of the real high peaks and low valleys experienced by the financial markets. Our rationale here is quite simple – what may be left on the table during the strongest of bull markets is saved from destruction during the next deep correction or mean bear market.