Investment Management

Investing: What We Believe

Many investors approach investing by trying to answer the “What” question. What asset protection strategy should I use? What stock or mutual fund should I own? What asset classes should I include in my portfolio? At Private Wealth Asset Management, we start the conversation with our clients with a different question. "Why?" Why are you investing your wealth? Why are you taking on the risks inherent in investing? Here are a few examples of the answers we hear from our clients (institutions and individuals) when we ask, "Why?"

  • Generate enough cash flow to cover the spending associated with lifestyle or the spending/distribution policy for the organization.
  • Protect principal.
  • Earn a "real return" to combat the corrosive effect of inflation on wealth (real return is a positive return net of taxes, net of fees, net of inflation).
  • Fund a future liability (retirement, a new campus, etc.).

One example of an answer we have never heard to the “Why” question: “Beat the S&P 500.”

The answer to the "Why" question is critical to developing the most appropriate investment management strategy and also provides the framework for gauging the success of that strategy in the future. Our “Why” process involves working with our clients to create a quantitative risk score that can always be measured in both good and bad markets. The risk score says, “This is how much risk we have agreed to be exposed to if the markets turn down."

Now we can have a real conversation about "What?" The "What" question is just math; the "Why" question drives the investment management strategy. The investment committee begins to answer the "What" question with a set of Capital Market Assumptions—assumed returns on asset classes based on historical returns with very small, controlled adjustments based on the committee's views. From these views, an optimizer is used to produce a set of recommended asset allocation models based on targeted returns. These models are then adjusted for different client accounts to accommodate tax preferences, unique structure of the client's balance sheet, the organization's desire to invest within a specific set of values and the need for income to name a few.

The combination of the risk score and the customized model for each client defines the expected rate of return (95% of the time) in both good and bad economic times—(the math). This makes investment management much easier as you have a clear expectation of what the results should be over time. With an answer to the "Why" and the "What" question, the final step in the Private Wealth process is to implement the strategy ("How").

screen showing stocks and investment management


Investment Methodology

Asset Allocation: In a 1986 research note, updated again in 1991, Brinson, Hood and Beebower asserted that asset allocation is the primary determinant of a portfolio’s return variability, with security selection and market timing (together, active management) playing minor roles. Note that this study is not about portfolio "returns" associated with asset allocation, it is about the variability of returns for the portfolio. We believe the decision about asset allocation will be the most significant contributor to the variability of returns.

One factor often overlooked in asset allocation as well as portfolio management and diversification is the impact of choosing active or passive investment styles in building your portfolio. We believe there are significant benefits to both and have adopted a “core-satellite” methodology.

Core: Indexed exposure across the most efficient asset classes, including both stocks and bonds, makes up the largest portion of our client portfolio management. We believe using individual stocks and bonds delivers better after-tax returns for this part of the portfolio, but we will also use a combination of ETFs and mutual funds to complete the core with low cost and tax efficiency in mind, while tracking the performance of the specific market.

Satellite: The satellites are investments in other asset classes and active managers in many asset classes. Depending on client goals and preferences, the satellite part of the portfolio may include investments in private capital (private equity, private debt, private real estate, global hedge funds), pre-IPO companies, active managers using concentrated positions, using options to hedge risk or enhance income and sector-tilting strategies designed to take advantage of short/intermediate trends to name a few.

Private Wealth Asset Management is one of the largest independent registered investment advisers and as such we have access to more than 2,700 private separately managed accounts, more than 7,500 mutual funds, every listed ETF, private company stock before it goes public, private equity, real estate and hedge funds. Our independent structure gives us the ability to compare and contrast the many investment management opportunities and resources found in small boutique and niche firms (too small for the big national banks and brokerages to invest in) as well as the largest national and international organizations.

With combined experience of more than 300 years acting as fiduciaries for clients, the Private Wealth team is not captive to the research, due diligence, tools and resources of one bank or brokerage firm. We bring the best from every corner of the investing world to bear for you. We would be honored to discuss “Why” with you.

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