HBKS ® offers extensive experience and broad knowledge in a wide range of investment options and a commitment to a personal, enduring relationship. Through a series of initial planning meetings, we learn about your financial challenges and objectives, explain our investment philosophy, then custom design a strategy for you, making recommendations based on a thorough understanding of your financial condition and goals.
Our approach to managing your investments involves:
Investment Philosophy and Execution
We believe in long-term strategic asset allocation. While neither asset allocation nor diversification can guarantee a profit or insure against losses, we believe a disciplined approach, over time and through market cycles, offers you the best opportunity to achieve your long-term wealth objectives. A strategic approach to asset allocation tends to minimize the temptation to get caught up in temporary trends or fads, and reduces the inclination toward excessive trading, which can generate taxes and transaction costs that can offset gains.
No one can time the markets. That said, we evaluate our strategic allocation assumptions and make periodic changes in allocations as shifts in long-term trends impact the marketplace. We also work closely with our clients to determine when a shift in their allocation is warranted. Clients’ risk tolerance often changes over time due to factors such as proximity to retirement or volatility in the capital markets.
We believe the allocation decision and process is more important than any other aspect of the investment planning process. Many academic studies, including the seminal 1991 study by Brinson, Beebower & Hood2, conclude that allocation decisions have more impact than any other factor on portfolio returns. As a result, we focus on allocation construction and implementation, and we adhere to the following:
- Asset allocation is a combination of quantitative techniques and qualitative judgments. Quantitative techniques use formulas and mathematical calculations; qualitative judgments are based on experience, acumen and assumptions.
- The results of most asset allocation optimization models are subject to the inputs and constraints used with each model. The goal of asset allocation, therefore, should be to provide underlying support for intelligent, reasonable portfolio management decisions.
- The challenge of asset allocation is combining art and science. Not all variables can be addressed by data; part of the process requires judgment, experience and common sense.
HBKS® customizes client portfolios. Employing an open-architecture investment platform, we select fund managers based on their performance, but also on how they fit your personal portfolio. We use sophisticated optimization and allocation models in an attempt to create portfolios that consistently deliver quality after-fee, after-tax return for a given level of risk – or conversely, achieve a reduced level of risk for a specified rate of return. The optimization process uses asset class assumptions and calculations and Ibbotson Building Block tools to produce efficient portfolios in terms of risk-return.
Active vs. Passive Investment Management
We believe there is a place in portfolios for both active and passive investments. A passive strategy may be appropriate when investing against a benchmark or when little advantage is expected from an active approach. For taxable clients, we regularly use tax-enhanced index managers to provide index-like returns in the Large Cap Core asset class, looking to capture tax losses that can be used to offset gains elsewhere in the portfolio. In other asset classes, active management can improve portfolio performance. Of course, there is no guarantee or assurance as to the outcome of either active or passive management.
Use of Alternative Investments
We have long believed that incorporating certain types of alternative investments (specifically, diversified alternative funds of funds) is a way to increase diversification and reduce portfolio volatility. Diversification benefits from low correlation between alternative investments, equities and fixed income. Less correlation among asset classes will lower overall portfolio standard deviation. In diversified alternative strategies, we look for:
- Consistent monthly and annual returns high enough to justify investing in a nontraditional asset class that has different risk characteristics (liquidity, transparency, lockups, tax efficiency, etc.) than more traditional “long only” investments
- Volatility significantly less than equity volatility; volatility that approximates bonds
- Low correlation to equity markets
We believe investment strategies with these characteristics (sometimes referred to as market-neutral investments) complement traditional low volatility investments. These strategies can provide excellent diversification properties for reducing portfolio risk. If properly implemented, they can provide a slightly higher risk profile than fixed income. We also use higher-volatility, higher-expected-return strategies as a complement to portfolio equity allocations.
Alternative investments involve a high degree of risk. They often engage in leveraging and other speculative investment practices, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees, and can be volatile.
Investment Manager Selection
We identify and select investment managers via a multiple-step process. We look for managers who represent a given asset class and have a high probability of repeating their historical performance going forward. No one factor of manager selection criteria identifies the “best” manager, so we evaluate a manager over a full market cycle.
On an ongoing basis, we closely monitor the investment managers in each asset category.
We systematically review the portfolio to ensure consistency with the agreed-upon strategic asset allocation. Because of taxes and transaction costs, we do not automatically rebalance portfolios over a specified period of time (e.g., annually), but when we believe it appropriate. This is usually triggered by significant over- or under-performance in specific asset classes, or because of cash inflows or outflows, or changes in client objectives. Unless agreed upon with the investor, we typically do not engage in “dynamic” or “tactical” rebalancing, which are tantamount to attempting to time the markets. Our analysis of the research in this area indicates that market timing does not pay off for the investor in the long term.
Asset Allocation Decisions
The tax implications of investments are key considerations in an asset allocation strategy. Depending on an investor’s financial profile, prevailing tax laws, investment holding periods, and the tax and return characteristics of the underlying securities, we may allocate different asset classes and investment managers for your taxable and tax-deferred accounts.
Monitoring the performance of your investment portfolio
We can provide reports tracking the performance of accounts you have requested us to monitor. Using portfolio management system technologies and our customized reports, we help you monitor the progress of your accounts individually or collectively.