Active Investment Management
Three characteristics set ABFS growth strategies apart: tactical asset allocation, stop-loss disciplines, and belief in the value of cash.
Asset Allocation
All investment managers must decide how to allocate money among different types of investments. Generally this involves spreading money across the broadest "asset classes" (stocks, bonds, and cash). Each of these classes has different risk and return characteristics, and each investor much decide how much to invest in each of these broad asset types. That general allocation -- called "Strategic Asset Allocation" is based on personal circumstances and risk tolerance, and stays fairly consistent for each person (changing only for major life events, such as retirement).
Within the three broad asset classes, however, many narrower divisions exist. For example, stocks might include U.S. stocks, foreign stocks, small cap or large cap stocks, growth or "value" stocks, and so on. In addition, a person might choose to allocate some money to specific industry sectors, such as healthcare or energy. This can involve very narrow definitions of asset class (for example, a recent ABFS analysis segregated the stock market into 239 different industry groups!).
Many investors and investment advisors ignore these distinctions, and simply establish a portfolio of stocks, bonds and cash that they hope will accomplish their goals. Having made a strategic asset allocation, they then just "hope for the best."
At ABFS, we take asset allocation a step further. We believe in actively "managing" both our clients' exposure to and participation in different asset classes on an ongoing basis. This includes shifting between "value" and "growth" stocks, between U.S. and foreign holdings, and among specific industry sectors. This process is called "Tactical Asset Allocation."
Tactical Asset Allocation
When international hockey star Wayne Gretzky was asked the key to his success, he reportedly replied, "Almost everyone skates to where the puck is; I skate to where I think the puck is going to be."
We believe it is just as important to position our clients to benefit from the next market move as it is to benefit from what is happening today. Making portfolio shifts as economic and market conditions change is part of effective risk management.
Our proprietary analysis of a number of factors, including the direction of interest rates, historical stock and bond valuation, and the economic environment and outlook guide the changes we make inside both the growth and income portions of your portfolio.
When we believe interest rates will rise, we are likely to shorten the duration of the bonds we hold in the income segment of your portfolio. When we believe the stock market is nearing a peak, we are likely to shift your growth assets to more conservative stock funds. When others panic, we might be buying. When others are still buying, we may be selling. We try to identify “pockets of strength” that may do well even when most other investments are struggling. This is "tactical asset allocation." Employing tactical asset allocation in your portfolio allows us to take advantage of market opportunities to enhance your returns and avoid many potential losses.
Note that tactical asset allocation requires a willingness to be “different” - to vary from the crowd mentality that often pervades Wall Street. Our goal is not to beat the Dow or the S&P 500 every month, but to think independently enough to produce superior results for you over entire market cycles.
To see performance and more detailed information about specific investment strategies, click here.
Use of Stop-Loss Disciplines
Application of stop-loss disciplines is an important element in our management style for ABFS growth portfolios. After carefully selecting and timing purchases, we establish a tentative stop-loss for each security purchased, based on analysis of historical volatility. As prices rise, so do stop-loss points, in effect becoming "gain preservation" exit points.
Adhering to these disciplines results in more transactions, since a stop-loss can trigger a sale after only a few weeks or even days. But we believe that the current market environment (which we deem dangerous) favors this approach. It enables us to keep money invested while stocks are rising, while still limiting your exposure to severe market declines.
The Value of Cash
Most managers will try to keep all of your money in the market all of the time. When they sell one holding, they immediately use the proceeds to buy something else, regardless of whether or not it is a particularly good time to do so. Appropriate Balance takes a different approach to cash than most managers. We use cash as a management tool that allows us to stabilize your portfolio when the market is dangerous. While we prefer not to, we are willing to hold large sums of cash (money markets) when we cannot find anything good to buy. Such was the case during the recent bear market, when we often had more than half the money in our primary growth strategies in money markets. That cash contributed to stability and positive returns in the strategies at a time when most stocks and funds were suffering sizeable losses.
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Active Investment Management
