Strategic Asset Allocation

Strategic Asset Allocation represents the foundation of our investment process. By selecting an optimalmix of multiple asset classes, we can balance the goal of generating consistent and competitive long term returns while taking into account an investor’s short-term risk tolerance.

Our approach is to establish target strategic allocation parameters for specific levels of risk, which then serve as baseline, long-term target allocations for four (4) broad asset classes:

• Stocks — provide long-term growth / capital appreciation
• Bonds — provide Income, preserve capital and act as a portfolio stabilizer.
• Cash-  provides short-term liquidity and serves as  portfolio hedge
• Alternatives — serve as a hedge against market volatility, while providing modest absolute returns. 

Our Strategic Asset Allocation targets are determined through extensive risk-return scenario analysis, portfolio optimization and our qualitative assessment of longer-term macro-economic conditions.

Global Perspective on Investments

To enhance potential return opportunities and  gain additional risk reduction benefits across our portfolios, we think it is prudent to spread investments across multiple asset classes / sectors both in the US and global capital markets.  Accessing a broader global investment opportunity set allows us to take advantage of a broader range of growth and income opportunities.

Within our Asset Allocation framework, we use a Global Core Satellite Approach to diversify portfolios.  Each portfolio allocation has its own unique risk and return characteristics:

Historically, global diversified portfolios, using a Core-Satellite approach have generated higher risk adjusted returns over long-term market cycles (i.e. which means the potential to earn higher returns in up markets” which more than offset the potential downside risk (volatility) in flat to down years.). We expect this trend to continue in the future.

The “Core and Satellite” structure provides for:

• Core Portfolio. represents a primary allocation of “core” or traditional asset classes which have limited performance variation from the traditional stock and bond indexes, are relatively efficiently priced and therefore provide market risk (“beta”) returns.  
• Given our long-term investment approach and philosophy of “staying fully invested” in accordance with our strategic allocation targets, the primary purpose of the Core portfolio is to capture the overall returns of stocks and bonds over a long-term market cycle.  
• Satellite Portfolio of multiple asset classes: includes a broad array of higher risk/higher return asset classes that have historically exhibited lower correlation factors relative to traditional Core stocks and bonds.  With these diversification benefits, the satellite asset classes can enhance total portfolio risk adjusted returns over long-term market cycles by generating “alpha” returns.
• Alternative asset classes or strategies: comprising of low volatile investment strategies, alternatives serve as “buffers” or portfolio diversifiers against traditional “market risks” in stocks and bonds.  By using a variety of hedging strategies, Alternatives can yield modest inflation- adjusted absolute returns over a market cycle with similar volatility characteristics exhibited by Fixed income assets.  In the current low return cash and fixed income environment, Alternatives are also seen as a substitute for cash and core fixed income, given the outlook for a flat to rising rate environment. 

Tactical Tilts

While stocks and bonds provide attractive long-term returns (relative to cash) their respective annual market returns can be extremely volatile.  As part of our investment performance mandate, we use tactical tilts within our strategic asset allocation framework to take advantage of changing market conditions that provide the opportunity to:

• Enhance total return performance and/or

• Reduce total portfolio risk, particularly during periods of cyclical market volatility and/or during cyclical bear markets where our objective will be to mitigate portfolio losses.

Tactical tilts are not intended to be “large market timing strategies” but reflect relatively modest changes to our Strategic Target allocations.

As such, we utilize a tactical asset allocation approach that involves assessing economic and market conditions on both a monthly and quarterly basis, to assess both the upside potential / downside risk for each asset class.  Each asset class is ranked in terms of its risk-reward trade-off and our portfolio allocations are tilted accordingly within specific guidelines relative to our Strategic Asset allocation targets, as summarized below.

i. Under Weight — Asset Class or Sub-Asset Class:

Assessment: If market conditions are unfavorable based upon our specific market indicators.

Objective: to reduce downside risk and potential losses.

ii. Over Weight — Asset Class or Sub-Asset Class:

Assessment: If market conditions are favorable based upon specific market indicators.

Objective: to enhance portfolio returns.

iii. Market Weight — Asset Class or Sub-Asset Class:

Assessment: If market conditions are “neutral” based upon specific market indicators.

Objective: maintain our Strategic Asset Allocation targets.

To assess whether market conditions are favorable or unfavorable, we look at a broad set of market indicators within the following categories.

• Fundamental Indicators: macro-economic trends, monetary policy, fiscal policy, currency trends.
• Technical Indicators: Relative Strength; Market trends; breadth, market cycles.
• Valuation levels: absolute and relative levels; mean reversion opportunities. 

We also monitor three (3) investment research databases to provided independent, objective and unbiased thinking into our tilt assessments and decisions.

• Asset Class Relative Strength (Dorsey Wright — Dynamic Asset Level Investing)
• Monthly Global Asset Allocation Model (Ned Davis Research)
• Proprietary Trend indicators (Market Smith)  

Manager Selection

Money managers are the decision makers investing in individual securities within mutual funds, exchange traded funds, or separate accounts.  As investment advisors on behalf of clients, the investment group within Opes has the choice of investing our clients’ assets in active money managers, passive money managers, or a combination of both.

Our approach:

We decide the mix of active and passive managers based on an evaluation of each separate asset class, including choosing the most effective type of investment structure for specific clients, whether mutual fund, exchange traded fund, or separately managed account. A well designed mix of active and passive managers will lower fees for clients while delivering diversification in strategy and increasing risk adjusted returns.  This is one of the most competitive advantages of our offer.

Active vs. Passive: criteria for assessing whether an asset class is better positioned to be active or passive:

• Return opportunity:  Is this asset class historically difficult for active managers to exceed?  Are there active managers that consistently out perform their index over time without simply taking more risk, or beta, than the market?
• Fees: What is the average fee for active management for this asset class?  What is the cost of passive management?  Does the active manager exceed the fees paid to them consistently in this asset class? 
• Market efficiency: Is the asset class well covered by analysts?  Is there a good opportunity for individual managers to add value through their research?  
• Risk reduction: Does active management provide an opportunity to significantly lower risk or beta in this asset class?  Is the percentage of total assets in this asset class greater than 5-7%? If so, adding a second manager to the asset class reduces short term volatility should a specific active manager stumble. 
• Predictability: Are there active managers who have not only exceeded their index over a long period of time, but have done so relatively consistently through different time periods?  
• Tax efficiency: How do taxes affect portfolio performance of the active and passive alternatives?  Does investment in these managers subject the client to short term or excess taxes?  Is this asset class and its managers best suited for tax-deferred accounts?  
• Style drift: Do active managers tend to stray outside of their asset class for performance and/or risk reduction? Have they added value net of those choices?  What are the criteria by which they have moved, and have they consistently added value by doing so? 

High Fiduciary Standards

Unlike brokers such as UBS and Goldman Sachs, who are not required to adhere to a fiduciary standard that takes your interests first. Opes’ Wealth Advisors make their recommendations within an environment that requires a fiduciary standard. Our qualified and experienced financial advisors are personally responsible for your analysis and making recommendations to you. Our Advisors work for you, not for transaction-based commissions. We select separate account investment managers, index funds and active mutual funds based on well-defined internal criteria, and we measure the results continuously.