We believe what separates portfolios of large institutional investors and retail investors is the commitment to build, and adhere to, a sophisticated investment implementation process. The Investment Committee at Diversified is tasked with developing and managing our process for managing client portfolios. The investment and economic worlds are constantly changing and evolving, and there should be dedicated individuals whose sole purpose is to navigate those waters for investors.
Fundamentals of Active Investing
Markets are constantly evolving and economic conditions changing, and a portfolio should adapt accordingly. We’re not talking about market timing here, which is the idea that you can get in and out of the market with any precision or constantly change your risk tolerance. What we’re referring to is that as economic conditions and asset values change, there are types of financial assets (stocks and bonds) that we believe will perform better in different environments. This could be overweighting geographies, market caps (large cap versus small cap), sectors, and even styles (growth and value for example). We believe the underlying asset allocation of a portfolio should consistently be adjusted to reflect the macroeconomic outlook, asset valuations, and investment opportunities that aren’t fully appreciated in market prices.
There are literally thousands of stocks, bonds, mutual funds, and ETFs (exchange traded funds) that investors can choose amongst. How do you decide which securities to use in your portfolio? From our perspective, we believe there should be a rigorous process for making those decisions, such as when to invest in passive strategies versus concentrated active managers. Even with that, how do you decide amongst the hundreds of institutional-quality asset managers in each asset class? By creating and following a framework for selecting investments based on both quantitative and qualitative metrics, we believe investors can create a more sophisticated and thoughtful portfolio.