Investment process
GLOBAL MACRO FACTORS
Modern Portfolio Theory tends to overlook macroeconomics and company evolution. CWM’s investment process starts with a top-down review of macroeconomic factors such as GDP, inflation, and interest rates.
SECURITIES SHORT LIST
Next, we screen for securities that have above-average growth potential, may be undervalued, and have high-quality financial characteristics, focusing on fundamentals such as earnings growth, free cash flow margin, and valuation.
QUALITATIVE ANALYSIS
Lastly, soft factors such as CEO quality and competitive advantages are analyzed to select stocks that will, hopefully, add alpha (α), often referred to as excess return in relationship to a benchmark, when adjusted for risk.
Investment Strategy
A risk-attentive, U.S.-centric strategy integrating passive index-tracking ETFs for core asset classes with high-quality, concentrated fixed income and equity models holding low, non-correlated, or negatively correlated securities.
Strategic Asset Allocation| A process that involves setting target allocations for various asset classes based on your risk profile and unique financial goals. Strategic diversification of asset classes, geographies, and styles effectively improves risk/return dynamics.
Dividend-growth and Tactical Models| Based on portfolio size and risk profile, concentrated U.S.-centric models holding high-conviction equities, combining different asset classes and sectors with varying levels of volatility.
Fixed Income Models | Based on portfolio size and risk profile, our interest rate forecast determine duration for concentrated models holding Treasury and investment-grade bonds with defined maturities and coupons.
Buying a portfolio investment| In-depth research helps ensure an understanding of potential risks and rewards. Please refer to Investment Process above.
Selling a portfolio investment| A portfolio investment will be sold when the portfolio manager (PM) recognizes that a macroeconomic and/or fundamental investment assumption is flawed, identifies an unfavorable structural change in a specific business, a security is trading at or above its intrinsic value, or has any other valid investment-related reasons.
“The essence of investment management is the management of risks, not the management of returns.”
Risk management:
Volatility | While volatility and risk are related, they are not interchangeable. Statistically, it’s the standard deviation of a market or security's annualized returns over a given period, essentially the rate at which its price increases or decreases. For example, investments in small and mid-size companies can be more volatile than those of larger companies, as the price can fluctuate rapidly in a short period. Beta (β) is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the market, particularly those of the S&P 500 benchmark index. Combining different asset classes with varying levels of volatility can help to smooth out overall portfolio fluctuations and improve risk-adjusted returns. Due to the benefits of diversification, A portfolio of two uncorrelated high-beta stocks can be less volatile than a portfolio holding two correlated low-beta stocks. For example, gold and gold related stocks, which have low or even negative betas, can be extremely volatile and risky. Volatility increases more after a significant drop than after a large rise and occurs in clusters. One of the primary purposes of controlling for volatility is to achieve greater downside protection. Managing volatility is crucial to maximizing portfolio longevity for investors who are taking withdrawals.
Dynamic hedging| If poor near-term prospects for equity markets are anticipated, the PM may adopt a defensive strategy for clients’ accounts by investing in fixed-income securities and money market instruments. At certain intervals, the PM will use an option purchase to limit the potential upside and downside of specific securities in the portfolio. There can be no guarantee that using defensive techniques will avoid losses.
Portfolio Monitoring| Conducting ongoing due diligence and monitoring investment holdings are vital parts of the investment strategy. Each portfolio is rebalanced at a pre-determined interval to its original strategic asset allocation weighting. Rebalancing aims to reduce volatility in your portfolio and manage potential risk by creating a systematic process to take profits from investments that have performed well.
Risk Tolerance| Understanding your risk tolerance refers to your ability to endure fluctuations in the value of your portfolio. We will determine your risk profile by evaluating your comfort level with various market scenarios.
Investing involves risk.Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. Diversification does not eliminate the risk of market loss. A long-term investment approach cannot guarantee a profit.
The Building blocks
“Everything should be as simple as it can be, but not simpler.”
