Investment Philosophy
Issue: Most of The Advocate Group’s 150 plus clients have a highly elevated investment risk profile caused by concentration of both their investment portfolios and their employment relationships around the stock of their employer. The generally accepted definition of concentrated risk occurs whenever one security reaches 5% or more of the total investment portfolio.
Major Challenge: Depending upon the employer’s equity compensation system and our client’s tenure as an officer, concentration around one security can exceed 90% of our clients’ overall investment portfolio. Portfolio concentration risk is not necessarily bad, but it is the “elephant in the room” which must be acknowledged and properly managed.
Strategy: The Advocate Group has developed an investment strategy which delivers an optimally risk-adjusted, highly diversified investment experience in the global economy.
For clients who do not have a concentration of wealth issue as stated above, The Advocate Group believes that our philosophy is still of value for investors who desire a broader degree of diversification in the hope of receiving a smoother ride between where they are and where they desire their investment portfolio to take them.
The Advocate Group’s portfolio design philosophy may best be described as a Barbell portfolio design philosophy; bringing the principles of institutional investment management techniques to the individual investor.
The Left Barbell (otherwise known as the traditional long-only or passive end) of our clients’ diversified portfolios (40-60%) consists of highly tax efficient, low cost, globally diversified, professionally allocated, Exchange Traded Funds (ETF’s).
The Right Barbell (otherwise known as the alternate or active end) of our client portfolios (40-60%) consist of a broad range of alternative asset classes and alternate security management strategies designed with the goal to either improve overall performance or provide a floor to downside risk without abandoning the opportunity for upside gain. The entire alternative side of our client portfolios contains asset classes and strategies which are totally non-correlated with the stocks, bonds, and cash of the ETF side. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio.*
Several examples of these alternative investments would be:
- Absolute Return managed accounts
- Managed Futures such as agricultural, bonds, stock indexes, metals, currency, and energy futures contracts
- Non-traded, public commercial real estate
- Non-traded, private, opportunistic commercial real estate
- Non-traded public commodity REITs
- Equity Indexed and Fixed Annuities
- Energy Partnerships
- Private Equity
The Advocate Group’s investment objective is not to beat an index, but to optimally invest in global economic growth by using well-diversified core capital market indices and well-founded alternative investments to help achieve enhanced return while mitigating risk; in essence, delivering the highest possible return per unit of risk our clients accept.
We believe that a properly designed risk-adjusted asset allocation may not be the best performing strategy in every period 1, but by minimizing “period-by-period” risk relative to the portfolio objective, we are much more likely, over time, to optimize long-term compound returns.
In essence, there is an often ignored yet genuine cost to seeking above-average returns. The cost of seeking higher returns is known as risk (otherwise known as volatility). We believe that in our clients’ diversified portfolios there are many great investments that are simply too expensive because they are too volatile. Scholarly behavioral research has shown that the negative psychological response to a portfolio loss is at least twice as large as the positive psychological response to a gain of equal magnitude. Assisting our clients by providing a less volatile path into their investment future generally helps regulate the emotional state of all stakeholders in the process and thereby preserves a better environment for success in bringing an institutional philosophy of investment management to our individual clients without the process being derailed by an emotional reaction to the changing markets.
As The Advocate Group strives to minimize “period-by-period” risk (volatility), we believe we improve the chances of achieving our clients’ long-term portfolio performance objectives.
1. Strategy discussed does not ensure a profit and cannot guarantee against a loss in declining market.
*Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
*Principal Risk: An investment in Exchange Traded Fund (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money or should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks; not diversified the risks of price volatility, competitive industry pressure, intentional political and economic developments, possible trading halts, index trading error.
