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Introduction What is Asset Allocation? Modern Portfolio Theory Diversification Reducing Risk with Bonds and Cash Equivalents Managed Portfolios Investment Selection How We Work With Clients Reports, Information & Communication Coordination Compensation Introduction
Research has proven that a disciplined academic based approach to investment management is the key to achieving long-term financial success. We work with our clients to develop an investment portfolio based upon their personal financial goals and tolerance for risk; we monitor each portfolio on an on-going basis; make changes when appropriate; and, most importantly, stay invested on the agreed upon course. We believe that, over time, this approach to investing will add value and more reliability to a portfolio. Return to Top What is Asset Allocation?
Asset allocation is the process of developing a diversified investment portfolio by combining different asset classes in varying proportions. Asset classes are groupings of assets with similar characteristics and properties such as U.S. large company stocks, government bonds, international stocks, and Treasury Bills. Every asset class has characteristics distinct from one another and, as a result, may perform differently in response to market changes and economic conditions. Your financial goals and attitude toward risk help determine which asset classes you should own and the amount that should be allocated to each class. How important is it to have an appropriate asset allocation? “...more than 90% of the variation in a portfolio’s performance over time is due to asset allocation” Source: “Determinants of Portfolio Performance”, Brinson, Hood, & Beebower, Financial Analysis Journal “… investment policy (asset allocation) dominates investment strategy (market timing and security selection)” Source: “Determinants of Portfolio Performance”, Brinson, Hood, & Beebower, Financial Analysis Journal “… for the long-term investor…the asset allocation decision is by far the most important” Source: “The True Impact of Asset Allocation on Returns”, Ibbotson While the process of diversifying your assets across multiple asset classes can help to reduce overall risk, it does not eliminate market risk altogether. Return to Top
Modern Portfolio Theory
Modern Portfolio Theory (MPT) is founded on the idea that for every level of risk there is an optimum asset allocation that provides the maximum return for that level of risk. To achieve this optimum risk/return portfolio, one must diversify across asset classes and within sub-asset classes. By following a disciplined asset allocation process, modern portfolio theory holds that you can both reduce the risk and increase the return in a portfolio. Our goal is to help a client determine their appropriate tolerance for risk, then design a portfolio that lies along our best estimate of what is called the “Efficient Frontier”, a theoretical line reflecting the combination of asset classes that optimizes the portfolio’s return at the determined level of risk. Return to Top
Diversification
The markets are comprised of many classes of securities, including stock and bonds, large company and small, domestic and international. The price movements in each asset class are distinct from one another. We believe that investors should not only diversify across securities within an asset class, but also across the various asset classes. Our portfolios generally include exposure to a wide range of asset classes: small, large, and mid-size company stocks; domestic and international; value and growth; emerging markets; government, corporate, and global bonds; commodities; and cash equivalents. Because each asset class plays a different role in a portfolio, the broad asset class exposure gives an investor the ability to achieve greater than expected returns with lower volatility. Return to Top
Reducing Risk with Bonds and Cash Equivalents
Investment managers try to balance risk and return in a portfolio. Both historical data and portfolio theory confirm that the expected returns on stock investments are greater than the expected returns on bonds and cash equivalents. As a result, portfolio managers make stock investments to achieve higher returns and use diversification in the portfolio to reduce risk. Even a broadly diversified stock portfolio, however, may still have more volatility than is desired. To reduce risk, less volatile asset classes can be included in the portfolio – bonds and cash equivalents. These asset classes have traditionally been considered to be primarily income producing. Academic research, however, has shown that the primary reason for their inclusion should be to reduce volatility. FMS utilizes a variety of bond and cash investment strategies to design portfolios with lower risk to meet a client’s investment needs and risk tolerance. Return to Top
Managed Portfolios
Based upon the concepts of asset allocation, diversification, and portfolio theory, FMS has developed and manages portfolios to meet a wide range of risk profiles and return expectations: Total Return Portfolio – designed to maximize portfolio return based upon current market and economic conditions for an investor who is willing to accept significant capital risk and market volatility. Aggressive Growth Portfolio – designed for long-term growth through investment in domestic and foreign stocks for the investor who is willing to accept the risk of significant portfolio volatility and fluctuations in market value. Capital Accumulation Portfolio – designed to achieve growth primarily through stock investments for the investor who is seeking long-term capital growth with less market volatility. Balanced Portfolio – designed to provide some growth through stock investments with reduced volatility through bond holdings for the investor who is seeking modest long-term growth but is willing to accept lower market returns in exchange for reduced portfolio volatility. Income & Capital Preservation Portfolio – designed to provide steady income along with some capital growth through stock investments with an emphasis on the preservation of capital for the investor who is seeking returns that outpace inflation with minimal portfolio volatility. Bond Portfolio – designed to provide income through investments in corporate, government, high yield, and global bonds for the investor who is seeking income without any expectation of capital growth. Return to Top Investment Selection
Portfolios include both “actively” managed funds from our “Select Funds” list as well as “passive” funds in selected Exchange Traded Funds (ETF’s), that are managed to mirror the performance of a particular market index. Funds included on our “Select Funds” list are selected based upon an in-depth analysis of both quantitative and qualitative fund data. All are managed by individuals or firms with a consistent record of long-term performance with returns greater than the returns of the fund’s corresponding market index. In an effort to enhance portfolio returns, we strategically allocate the weightings of these funds in our portfolios. In addition, we utilize passive or “index” funds to strategically target specific market sectors based upon the current economic environment and market conditions. Return to Top
How We Work With Clients
To help us determine the proper asset allocation for a client, we begin by having the client complete an “Investor Profile” that is designed to provide us with information about the attitudes toward specific types of investments, the ability and desire to accept the risks that are inherent with any investment, and the client’s willingness to accept market volatility. We also discuss investment goals and financial objectives for the funds to be invested. Based upon the profile and those discussions, we decide on a specific asset allocation model that is appropriate for the client’s situation. An “Investment Policy Statement” is then prepared that summarizes your investment goals and objectives as well as our investment philosophy, procedures, and duties as an Adviser.
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Reports, Information & Communication
Portfolio assets are held in an investment management account and trades are cleared through Pershing, LLC. Statements are sent to clients on a monthly basis directly by Pershing. FMS does not take custody of any client assets and does not have withdrawal or transfer rights.
After the close of each calendar quarter, client’s will receive a detailed management report that lists all the assets held in the account, transactions made during the quarter, details of any dividend and capital gains distributions, and value of each holding, history of investment results and performance results of the comparative benchmarks for the same periods, and market commentary.
We meet annually, or more often if needed, with all clients to review their portfolio and its performance, the current investment holdings and asset allocation. At the same time, we update the “Investor Profile” and the client’s financial goals to make certain that the portfolio continues to be appropriate for your situation. We are also available to meet at other times as necessary. These updated reports and other pertinent documents can be kept in a notebook provided as a service for our portfolio management clients.
Return to Top Coordination
Many clients have investments in other areas such as qualified retirement accounts (Profit Sharing, 401(k) Plans), Individual Retirement Accounts (IRA's), annuities and life insurance. We can also review these plans to make certain that the investment allocation matches your risk profile and can also create asset allocation models for the investments available in those programs that will enable clients to have a sound and well-coordinated overall investment strategy.
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Compensation
As an independent, investment advisory firm, we charge a fee that is based upon a percentage of the assets we hold under management. There are no proprietary funds or fund management firms that we are required to use … we invest in funds on our “Select Funds” list based upon the rigid selection criteria we have established and in passively managed “I” share or “Indexed” funds. Other than nominal clearing fees that are charged by Pershing for some fund trades, there are no commissions, sales’ charges or “back-end loads” for the funds we utilize. This enables us to make investment decisions without concern for commissions that were paid or surrender charges that might be imposed. In short, we are paid as investment managers to design an asset allocation program and select investment holdings that match both of an appropriate asset allocation and each client’s personal financial needs, objectives, and risk profile.
Return to Top For more information or to arrange a free, no obligation consultation to help determine if this approach to investing is right for you, please contact us by phone or e-mail.
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