Broker Check

How Smart is your Portfolio?

| August 07, 2018
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I have been an avid investor since the 1990s, and I believe most of the innovation and improvement in the investing world I have seen has happened in just the last few years. This month, I will highlight some important recent changes in the investment landscape and comment on how we are using these improvements to benefit our clients. If you are curious to learn more about the specifics of what we actually invest in, we would be happy to share that with you in person or over email as we are not allowed to comment on specific investments in these articles.

“Smarter” Portfolios:  In 1981, a group of academics from the University of Chicago created Dimensional Fund Advisors (DFA) to provide investments that implemented their research. In 2000, DFA began offering mutual funds that targeted two specific “factors” which they defined as broad and historically persistent drivers of additional returns:

  • Value: stocks underpriced relative to fundamentals
  • Size: tilting to smaller, more nimble companies

DFA had this market to themselves for many years and only offered their funds through financial advisors, many of whom used their funds exclusively. Other fund companies have recently entered this factor, or “Smart Beta,” market, and additional factors have been identified:

  • Quality: stocks with more solid balance sheets and stable earnings
  • Momentum: stocks with upward trending prices
  • Minimum Volatility: favoring stocks with historically lower risk
  • Dividends: favoring stocks that pay consistent and growing dividends

These investments' factor exposures are now available in efficient and low-cost Smart Beta ETFs, which combine the advantages of indexes and active management and are offered across many asset classes including bonds and emerging markets. There are ETFs that implement multiple-factor indexes such as the MSCI USA Diversified Multiple-Factor Index and the MSCI Emerging Markets Diversified Multiple-Factor Index.

Making the World a Better Place:  Values-based investing started with a faith-based  approach that screened out “sin stocks” from companies that produce goods and services such as tobacco, gambling and alcohol. These early negative-screen portfolios often sacrificed investment performance and put the investor in the unenviable position of having to choose between doing good and achieving good market returns.

The negative screen approach has evolved into a secular focus on sustainability with investments that emphasize Environmental, Social and Governance (ESG) issues ranging from climate change and diversity to board effectiveness. And like Smart Beta, these ESG funds are also now offered across most asset classes, which allows for the development of globally diversified ESG portfolios.

Our favorite active fund managers have taken sustainable investing even further by focusing on true value creation.  They seek to invest in companies that operate with integrity and create value not only for their customers but also for their employees, supply chain, communities, the environment, and our larger society.  The dollars flowing into these companies enables these businesses to create still more value including enhanced value for their shareholders. Just as importantly, they seek to avoid investing in companies that engage in predatory behavior or seek profit at all costs— practices which harm customers, society and eventually shareholders too.

Putting It All Together

I have written in the past about our use of BlackRock’s Aladdin risk platform, and we continue to use Aladdin for our global asset allocation and income models across the ESG and Smart Beta universes also. We provide several families of portfolios, ranging from 100 percent bonds to 100 percent stocks, to offer a full range of risk/reward tradeoffs for every investor.

Pure Smart Beta Portfolios:  these portfolios are comprised completely from factor tilt ETFs that are designed for market outperformance potential with very low underlying investment management fees

ESG Portfolios:  we offer both ESG ETF portfolios as well as hybrid portfolios that feature select active funds to provide both values alignment and the potential for market outperformance

Hybrid Portfolios:  these portfolios are a blend of ultra-low cost “pure beta” ETFs for efficient exposure to broad asset classes along with targeted Smart Beta factor tilts and careful use of higher-cost active mutual funds designed to provide market outperformance

Custom Portfolios:  we offer custom portfolios for clients with concentrated positions, holdings with significant capital gains, or other special needs

To Learn More

We provide a compassionate and confidential approach to help clients get their financial houses in order and align their investments with their values and overall holistic financial plan. We can work on an ongoing basis or provide specific quotes for any of your one-time planning or investment needs and we always offer an introductory meeting at no charge to allow you to ask us anything that is on your mind and get to know us better.

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