Broad Mutual Fund Allocation Through Open Architecture
Broad allocation enhances performance and reduces the portfolios investment risk. For a global investment portfolio, we believe that the use of mutual funds achieves these objectives. Identifying the optimal fund managers through open architecture is critical to the fund selection process. Until recently, the objective analysis and screening of a broad range of mutual funds offered by open architecture research had been accessible primarily to institutional investors. Our open architecture platform not only identifies optimal fund managers but also provides ongoing monitoring and replacement solutions. This system strives to obtain superior returns (and in many instances with reduced volatility) to a funds relevant benchmark. Tandem Capital provides all of its clients, including private individuals, access to this screening. In order to achieve maximum portfolio risk adjusted performance, we have implemented the open architecture approach as an integral part of investment selection and portfolio management.
Tandem Capital’s core strategy is its asset allocation policy. This strategy identifies a mix of investments which are best suited to meet investors’ goals, given their risk tolerance and time horizon.
Assessment of Risk
Since many investments offer unpredictable results, by nature, they must contain various degrees of risk. Therefore, It is important to first clarify client risk orientation and return targets in order to construct the most suitable portfolio.
We quantity risk in terms of the volatility of investment returns and measure this volatility with a statistical tool known as standard deviation. Standard deviation can be applied to one asset or to a whole portfolio of assets. At the portfolio level, we reduce overall risk through diversification.
Tandem Capital designs each investment portfolio for its clients targeting the highest returns on a risk adjusted basis.
The universe of securities can be divided into two distinct asset class groups. They are generally categorized as equities and fixed income. The Equity class is further sub-divided by capitalization level (large cap, mid cap and small cap); investment style (value and growth); and/or market (domestic, developed, and emerging). Fixed income securities are sub-divided by the issuer (Treasuries and corporations); maturities (long-term, intermediate-term, and short-term); and credit quality of the issuer. The choice of asset classes is often driven by practical considerations, such as the size of the portfolio, trading costs or other investment management factors.
Tandem Capital manages client portfolios by identifying the best investment options among different asset and sub-asset classes.
When constructing personalized asset allocation models, we begin by grouping securities that share certain characteristics into asset classes, such as large-cap stocks and long-term bonds. For each asset class we make certain assumptions, which include estimates of expected returns, risk and correlation among the various asset classes.
This data is then processed with information gathered from the clients profile to provide the investor with an optimal asset allocation investment portfolio.
The portfolio resulting from this process contains a mix of investments providing the best chance of yielding the clients desired return with the least amount of risk.
Strategic and Tactical Asset Allocation
Asset allocation approaches can be characterized as either strategic or tactical. Strategic asset allocation (SAA) is a long-term investment discipline designed to achieve stated goals. It takes into account an investors risk tolerance and investing preferences in an attempt to identify an optimal mix of investments.
Tactical asset allocation (TAA) covers shorter time horizons, usually a month or a quarter, with the goal of exploiting changes in near-term market conditions using timely and accurate forecasts.
TAA is frequently used as a strategy of over- or underweighting allocations relative to strategic asset allocation policy.
Tandem Capital uses sophisticated quantitative techniques in order to determine TAA recommendations for its clients and then incorporates them in conjunction with their specific strategic asset allocation portfolio.
Benefits of asset allocation as a strategy:
- A disciplined way to invest – Investors are not subject to the whims of the market. Instead they follow their asset allocation policy recommendations until a new policy is warranted, whether due to a change in risk orientation, market environment or personal needs and/or objectives.
- Risk reduction through diversification – Asset allocation exploits the interrelationships among different asset classes to provide portfolios that offer the minimum level of risk for the selected level of expected return.
- Portfolio risk matched with investor risk orientation – Asset allocation can be constructed for specific risk levels while accounting for investment goals and investing preferences. From a practical standpoint, asset allocation offers unique solutions for unique needs rather than promoting a one size fits all solution.
Tandem Capital’s investment selection process is a comprehensive and structured approach, executed by highly experienced professionals. The process centers on the consistent application of a model, which examines both quantitative and qualitative factors. This effort seeks to understand the investment manager’s method and the risk factors associated with it, and to forecast the probability of a manager continuing to deliver superior investment results in the future.
The selection process begins with an iterative systematic screening that identifies appropriate candidate firms for further consideration. Database records are scanned to identify threshold characteristics such as assets under management, length and quality of track records and team tenure. At this stage we also examine absolute and nominal returns over multiple time periods.
During the next phase of the analysis, investment managers are interviewed in order to determine the key areas of their strengths and weaknesses that differentiate them from other candidates.
The final phase of the evaluation process is the recommendation phase, in which after all concerns are fully explored and an open debate takes a place, a recommendation to reaffirm, suspend, terminate or hire a manager is made.
Afterwards, Tandem Capital holds a monitoring review, in which managers are evaluated regularly to ensure they continue to meet our standards. This includes quantitative analysis on a monthly basis and qualitative examinations as described hereinafter. We specially pay attention to any changes in key personnel, ownership and style drift or to unexpected increase in risk.
An in-depth quantitative examination of past performance and intensive analysis of the holdings-based sources of the returns are necessary in order to lead to superior investment results versus a passive benchmark, but one can not emphasize enough the value of qualitative research. Therefore, the selecting process must capture both of these dimensions.
Of primary importance in the evaluation of investment managers is the identification of investment team’s talent, experience and quality. It is our expectation, confirmed in personal interviews, that portfolio managers are able to demonstrate intimate knowledge of the holding in their portfolios, including strategy and investment thesis behind each security. We investigate the effectiveness of the teams’ operation, as well as their exposure to periods of adverse market condition.
Another key fact is the investment team’s stability and motivation. It is important that the employment environment be one that is characterized by creative thinking and challenging debate. The analytical interviews also try to explore if the team displays a sense of cohesiveness, since high performance team are also characterized by high level of trust and dependence. In addition we examine the quality of the investment process and how well it implemented by analyzing the team’s philosophy, strategy and judgment.
The research and oversight of Tandem Capital can help investors feel confident that the investment managers and strategies have been held to a high and strategies- consistent standard of review.