In lieu of an Investment Brief this quarter, we thought it would be helpful to put out an FAQ to address some of the investment-related questions we have been getting:
- Remind me what the benchmark is.
- We want to provide some appropriate measure of comparison for the returns listed on your quarterly report.Your benchmark is customized to reflect your risk level by including stocks and bonds.The stock portion of the benchmark is comprised of widely-known, well-diversified indexes that reflect broad exposure to large-cap, small-cap, domestic and international equities.
- Couldn’t I just invest in something that tracks my benchmark?
- One investment strategy is to utilize low-cost “passive” products that closely follow their respective indexes.An alternative approach employs “active” managers who attempt to take advantage of perceived mis-pricings and may structure their portfolios to look quite different than the market.We believe it makes sense to use certain active managers in pursuit of higher returns, though by definition, performance will deviate (both positively and negatively) from the market.
- Why might I be trailing my benchmark?
- We have pursued a value-oriented investment strategy with our clients’ portfolios.Value, like other strategies (growth, momentum, etc.) experiences periods when it is in favor and out of favor.The last several years have been relatively difficult for value managers as low-quality, richly-priced companies have led the market.We do not expect this environment to persist indefinitely.
- Why “value”?
- Our own internal research has confirmed what we have read and studied for years: the simple idea of buying companies that are temporarily selling at prices significantly below a conservative estimate of intrinsic value has generally yielded results that are quite attractive compared to alternative methods. While there is no guarantee that a value approach will outperform in the future, we believe the odds of this approach succeeding increase with one’s time horizon.
- If a value strategy isn’t currently doing well, why not switch to a different one until it does?
- Market timing is notoriously difficult and is not a skill we (or anyone else to our knowledge) have mastered.We prefer to direct our clients’ money only in ways that we think have a high probability of benefiting them.
- Are the fees I pay included in my return numbers?
- The returns shown are net of all mutual fund fees and your NorthWest Financial advisory fee if it is withdrawn from your accounts.The benchmark returns do not include any fees because it is not possible to directly invest in them.In order to replicate the benchmarks, one would need to use index or exchange-traded funds (which have fees).
- How are political uncertainty, Fed policy and other “Headline Risks” handled within the strategy?
- The majority of our fund managers employ a “bottom-up” approach to portfolio construction.This means that ideas are generated by scouring the market, stock by stock, in search of bargains.Macro-type risks are evaluated in terms of how they could affect individual companies rather than the market as a whole.For example, the implications of rising interest rates may be different for a real estate company than a bank.In our opinion, the current risks underscore the need to have an active manager overseeing portfolio decisions rather than simply buying the most popular stocks.
- Shouldn’t my portfolio be more conservative, given all of the negative news?
- There is certainly a lot to be worried about: record debt levels, experimental central bank policy, anemic global economic growth, political instability, the list goes on.The world has rarely experienced a time without significant threats however, even if it does feel like “this time is different”.We give little credence to doomsday scenarios that call for going 100% to cash or gold.A better approach in our opinion is to sit down with your advisor to discuss your risk tolerance and make appropriate adjustments from there.
If you have additional questions or concerns, please give us a call.
Aaron Pettersen, CFA, CFP®