Why We Focus on Asset Allocation, Not Securities Selection

Securities selection emphasises understanding details of each holding as a means of determining its present and future value. Such detailed research demands a lot of costly resources, such as human capital, and a lot of time, to execute. Beyond just the costs involved, the results of deciding whether to invest in a particular security day in and day out leads only to incremental, if any, profit.

According to the 2022 SPIVA US Scorecard by S&P Dow Jones Indices, 94.79% of US domestic equity fund managers who participate in active fund management have underperformed the relevant passive index benchmark in the past 20 years. In other words, only about 5% of active fund managers delivered positive returns against their benchmark. Data for other countries and time periods are comparable.

Not sure about you, but we didn't like the sound of those odds.

We don't engage in securities selection and refrain from using actively managed funds; instead, we build our customers’ portfolios with a carefully selected assortment of highly diversified, liquid and low-cost exchange-traded funds (ETFs). These index-tracking investment tools enable our customers to gain diversified, long-term exposure to a variety of asset classes and geographies.

In other words, rather than deciding whether to buy more shares of General Motors or General Electric, we determine how much we should allocate towards North American Large Cap Equities versus Emerging Market Equities or Gold. This keeps overhead costs, such as salaries for research, low. Applying an asset allocation management strategy emphasises risk management for medium-to-long-term investments. Several long-term studies also have concluded that asset allocation is responsible for between 80% and 96% of a portfolio’s return profile.

With an asset allocation strategy, we can focus on maintaining the level of risk generated by the combination of growth and protective assets in a given portfolio instead of on the individual performance of each asset. We apply asset allocation to an investment framework, ERAA™, that makes decisions based on macroeconomic data. The macroeconomic data comes in, and our system determines what asset combination is best for achieving the risk level you indicated. So, if the economic environment changes to, say, a recession, the system would change the combination of assets you have to maintain your chosen risk level.