Generally in every portfolio we allocate to core equity holdings, core fixed income holdings and for larger accounts, strategic sectors to complement the core, and finally individual stocks to complement the sectors.
Every stock, bond, mutual fund, ETF, etc. identifies with one of the 9 “tic-tac-toe” looking Morningstar style boxes.
In the core equity allocation we incorporate the Morningstar style box approach, generally allocating 40% to the large cap asset category, 30% to the mid cap and 30% to the small cap asset class category. We equally weight both the growth and value styles of money management, thereby eliminating the “blend” style as we have achieved balance and order in our weightings.
In the fixed income allocation we again incorporate the Morningstar style box approach, this time for fixed income positioning. The axes are combinations of high, medium and low quality bond categories and limited, moderate and extensive interest rate sensitivity categories, resulting in 9 style boxes. Interest rate sensitivity is in part, a function of short, intermediate and long term maturities.
We prefer to nearly equally weight 3 of the 9 fixed income categories, specifically the high quality and limited interest rate sensitive bond category down to the low quality, limited interest rate sensitive bond category. This result of this strategy includes holdings in investment grade, multi-sector (aka strategic income) and high yield fixed income holdings.
The S&P has identified 10 sectors in the economy across numerous industries. The 10 sectors are technology, health care, materials, financials, telecommunications, consumer staples, consumer discretionary, industrials, energy, and utilities. Sectors fall in and out of favor as driven my market conditions. The diversified approach of the core equity allocation detailed above will own any number of these sectors, in various weightings, and according to the growth or value asset management style of the manager(s), benchmark(s) or indexes.
We add alpha in the form of potentially increased appreciation by strategically adding a number of these sectors individually to the core holdings. Some firms have labeled this strategy “core and explore”. Our firm prefers to identify this strategy as core and satellite as satellites are used to improve communications around the world, our satellites are intended to increase overall performance to the core holdings.
In addition to this core and satellite infrastructure of the account, we identify individual stock holdings residing in key sectors to add even more alpha to the overall performance of the portfolio. Our stock screens for these satellite holdings are extremely strict and rigorous, focusing heavily on revenue growth, earnings growth, cash flow and debt.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns, and a diversified portfolio does not assure a profit or protect against loss in a declining market.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.