Risk matters…try to emulate investing like an Institution! Though individuals are not “Institutions”, they can still construct a portfolio that utilizes multiple non-correlated investment platforms. They can develop a highly customized approach with an emphasis in order of: preservation of capital, income creation, and capital appreciation. (The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, By Mebane T. Faber and Eric W. Richardson, 2010)

In today’s investment advisory world the vast majority of portfolios are managed in a very typical and traditional form. These traditional approaches to investing have fallen short in the current economic world we live in. At ARG we distinguish ourselves by providing access to a portfolio tailored to potentially withstand any scenario of market, interest rate, and geo-political circumstance. The analogy of the great Greek warship the Trireme comes to mind. What made the warship so lethal was its use of both sails and oars. When the wind was strong they sailed. When the wind stopped they rowed. In traditional style investing one uses just the sails and a “buy and hold” mentality. “Sailing” in this case refers to constrained management that adheres to a strictly index style investment strategies. Great if the winds are moving in the right direction. Should the winds blow in the wrong direction, so too will your portfolio. Remember 2008? Having the ability to both sail and row within your portfolio can potentially yield enhanced results. Correlation of the old style construction still used today is as high as it has ever been in the past. We went from Brinson, Beebower, and Hood in 1986, stating that over 93% of your portfolio performance variance is due to the asset allocation policy (“Determinants of Portfolio Performance,” Financial Analysts Journal, July-August 1986); to Markowitz in 2010, stating that 70% of that same variance is due to market movement (Ibbotson, Xiong, Idzorek & Chen, Financial Analysts Journal, 2010). What is there to do?

“Rowing” style investing allows the portfolio management to be far freer to work through “secular” bull and bear markets, versus through “simple” bull and bear markets. This unconstrained approach removes the limits on the degree and frequency of equity asset allocation shifts. Secular bear or bull, and range bound markets may reward more active management. In rowing markets, the wind alone may not offer enough power to achieve your goals, or the wind may be blowing in the wrong direction. The core of your equity stance should be both styles. Satellite funds should be a consideration only if they are stock picking funds versus indexed approaches.

When looking at how the Endowments and Pension Funds have performed over the last 20 plus years, it is no secret that they use alternative strategies to attain superior results. Yale has targeted for 2015, some 76% to alternative positions (Yale News 9-14), and while according to Harvard, their Policy Portfolio for 2015 has roughly 57% (Mendillo, Jane. Harvard Mgt. Endowment Report 9-14). ARG is a staunch believer that like the referenced endowments, you can achieve superior returns and lower volatility by deploying sailing and rowing styles, and targeted alternative strategies.

Moving into the alternative side of the equation, the use of multiple non-correlated asset classes has been historically proven to reduce the risk of any portfolio. This is the attempt to move back to Brinson, ET. Al. to create that positive performance variance which is realized through one’s allocation policy, and less so on the movement of the market. As mentioned earlier, correlation in traditional style investing is at an all-time high. Bonds would normally be the balance of the risk/reward scenario, but due to our historically low interest rate environment and the future of rates inevitably rising, thought to reallocation out of traditional fixed income boxes is imperative. Due to the inverse relationship of bond prices and interest rates, there will be an adjustment period when those rates rise. Here, alternative strategies become a more attractive and necessary component. An example of high dividends and a floating rate that would take advantage of rising rates would be Private Debt. REITs, both debt and equity style, will also provide additional asset class separation. In addition, we saw in 2008 what an exposure to Managed Futures could do as this index was up in excess of 18.1% (http://www.barclayhedge.com/research/indices/cta/sub/sys.html). All of this creates a compelling case for multiple non-correlated asset classes.

ARG has created a discipline in its allocation models, the process to implement them, and the capabilities to construct portfolios with the emphasis on mitigating today’s risk; all the while creating the paths for growth. We welcome the opportunity to work with you in realizing your goals.

 

Asset Allocation and Diversification does not guarantee investment returns and does not eliminate risk of loss. Opinions and recommendations offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting and legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Real Estate Investment Trusts (REITS) are not suitable for all investors. REITs carry substantial risks including, but not limited to illiquidity, limited transferability, absence of a public market, potential for development risks and construction delays, and the risk that the program does not achieve its objectives. Quarterly statements of your REIT account holdings will not show value fluctuation because REIT share prices do not change until the REIT goes public.

Managed futures are not suitable for all investors. Futures, forwards and options trading is speculative, leveraged and entails a high degree of risk, which can quickly result in large losses as well as gains. There is a limited ability to liquidate an investment in a managed futures fund. Investors should be aware that they may be required to bear the financial risk of an investment for an indefinite period of time. Although most managed futures funds have historically been non-correlated to traditional investments, diversification does not assure a profit or guarantee against loss in a declining market. Managed futures funds may be subject to substantial charges for management, advisory and brokerage fees. Before investing in a managed futures fund, you should carefully study the fund’s prospectus or Private Offering Memorandum. In addition you should obtain advice from your investment and/or tax professional.

Private Debt and Equity are not suitable for all investors. Investors must meet strict suitability requirements. An investment in private debt or equity may be considered speculative and involves a high degree of risk, including risk of substantial loss of principal. There is no assurance that the investment objectives of this program will be attained. Each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. A more detailed description of the risk factors is found in the prospectus. Please ensure you read the applicable prospectus in order to fully understand all the implications and risks of the respective offering which it relates.

Risks also include: No public trading market currently exists for shares; financial market and event driven risks; distribution risks (the amount of any distributions is uncertain); Interest rate risk; and liquidity risk. As with all investing, past performance does not guarantee future results.