PASSIVE OR ACTIVE?
Some investment advisors advocate a "passive" investment approach, which essentially seeks to match index performance across asset classes over time. This methodology benefits from low costs and can be a good fit for investors with a long time horizon. However, there are some drawbacks in an all-passive approach. On the equity side, passive investors can be exposed to over-valued securities when their portfolio mimics a market cap-weighted index such as the S&P 500. For example, holding all else equal, when a particular company's equity market capitalization increases, the weighting of that company increases in the S&P 500 index. This means an investor in an S&P 500 index fund faces increasingly concentrated exposures to large companies that may be over-valued. Similarly, for bond index funds, investors can become overly exposed to bond issuers with an increasing volume of outstanding debt.
On the other hand, some advisors suggest taking a completely "active" investment approach, which means that a client's portfolio is managed with a view of beating the market, taking more concentrated bets in fewer securities, and weeding out over-valued assets. There are also active management philosophies that seek to return a stated percentage irrespective of how the market moves (these are often called "market neutral", "absolute return", or "hedged" strategies). Many of these strategies serve very specific purposes and can be appropriate across short, intermediate, or long-term timeframes. However, active management also has its drawbacks. Some strategies can be expensive, with portfolio managers charging high fees for their services and intensively buying and selling securities which increases transaction costs. Also, research has shown that managers who try to beat the market over extended periods of time ultimately fail (often because their high fees eat up too much of the return).
At 31 North, we believe that prudent portfolio construction starts with ensuring there is sufficient diversification and purposeful exposure to more than one asset class. We think there is merit in both passive and active methodologies, but we also recognize the potential pitfalls of employing only one philosophy at its extreme. Therefore, through our strategic alliances with FTJ FundChoice and SEI, our investment management process seeks out and selects the most efficient passive ETFs and mutual funds available to comprise the "core" of each client's portfolio. Then, depending on unique factors such as risk tolerance and time horizon, we institute "satellite" strategies that are actively managed to add value and/or hedge against large market swings. In summary, we seek to construct portfolios that that align with individual risk preferences and optimally combine the best elements of passive and active investing.
The universe from which we select funds and specialist managers is carefully curated. Both SEI and FTJ FundChoice help us screen for underperforming and inadequate investment choices in the passive and active realms. We then institute additional, proprietary screen processes to weed out securities and managers who cannot justify their internal expense ratios. By constantly refreshing these screens and monitoring performance, we uphold our commitment to pursue continual performance improvement for the benefit of our clients' portfolios and their individually tailored financial plans.
bringing it all together
As managers of your wealth, our overall mandate is to help you achieve your financial goals and therefore reach financial independence and fulfillment. Given our belief that investors with a holistic plan are much more likely to "stay the course" when global markets experience inevitable ups and downs, 31 North places special focus on treating planning and asset investing as two equally important components of a 360-degree wealth management system. Our process starts by leveraging powerful technology and a comprehensive discovery process to establish your financial plan, and culminates with the construction of a portfolio that emphasizes disciplined allocation between strategic and tactical investments. As we all know, life happens, so as time goes by we dynamically adjust your plan (and potentially, your investments) in response to life events that occur. Let us show you how our holistic process can benefit your particular situation by contacting us.