Our investment process is a multi-layered investment discipline which is based on the research and strategy of the Riverfront Investment Group which:
-Starts with your investment plan and the desired strategic asset allocation
-Continues with tactical allocation, and optimized security selection
-Finishes with disciplined risk management
The power of our process is that the performance of the portfolio does not rest on the success or failure of any one set of decisions. By executing simultaneously on all layers of the discipline, we feel our portfolios increase their potential to provide superior performance as different layers in the process have added value at different points in time.
Strategic allocation is a dynamic process where the price matters
Our strategic asset allocation decisions are built upon a belief that markets are not a random walk, i.e., the belief that asset returns cannot be predicted because they move up and down randomly. We believe that careful analysis of historical returns reveals a strong relationship between the price paid for an asset and the subsequent returns investors can expect to earn over the next 5-to-10 years. In fact, depending upon the asset class, we have found that between 60% and 90% of the variation in long-term returns can be explained by the price level of the asset classes at the beginning of the investment period.
Sophisticated mathematical models are built describing these historical relationships for each of the various asset classes (large cap growth stocks, investment grade bonds, etc.). Current valuation levels are input to these models, producing a forwarding looking estimate of potential return based upon whether the asset class is priced above or below its long term average. When combined with volatility and correlation estimates, these capital market assumptions form the inputs to our asset allocation process.
Because we believe that the price paid for an asset matters, our return expectations change as asset prices rise and fall. As a result, our strategic allocation models are dynamic and will change as our perception of long term value in the market changes. We believe that the resulting asset allocation models provide a strong, long term foundation for our investment portfolios.
Tactical tilts incorporate price, economic and earnings momentum into our asset allocations
Tacitcal asset allocation is defined as a series of risk-controlled modifications to the strategic allocation based upon shorter-term opportunities and risks that are seen in the markets.
Strategic allocation determines where value exists in the market. Tactical allocation builds upon this valuation framework by incorporating price, economic and earnings momentum into our asset allocation decisions.
For us, strategic allocation is largely a mathematical exercise, while tactical allocation combines mathematical valuation models with market judgment and technical analysis. Our philosophy for making these tactical allocation adjustments is based on three key principles:
• "Don't fight the Fed"
• "Don't fight the trend"
• "Beware the crowd at extremes"
Our biggest tactical bets are reserved for markets where investor sentiment has driven valuations to an extreme, where the trend in those markets is showing signs of turning and where Federal Reserve policy is clearly supportive of the market's new direction.
Security selection is determined utilizing a variety of resources within Wells Fargo Advisors.
When building portfolios special attention is paid to internal expenses, predictability, tax efficiency and income needs. Our portfolios are built to take into account these attributes along with our tactical adjustments through the combination of exchange traded funds (ETFs), bonds, mutual funds and closed end funds.
Risk Management is taken as seriously as Security Selection
Brilliant predictions are less important to our management style than:
• A thorough understanding of the risks assumed,
• Vigilant review of the performance impact of those risks, and
• Quickly addressing those strategies that are not meeting expectations.
Systematic rebalancing is essential to maintaining the consistency of an investment account's returns. Rebalancing requires the investor and advisor to set up a targeted asset allocation with target percentages in each category. At least once per year, and sometimes as often as once per quarter, the assets are rebalanced back to their original weightings by reducing the assets in classes that have exceeded their specified percentages and adding to the assets in classes that have dropped below the original settings. The number of times the portfolio is rebalanced in a given year depends on which account is selected: tax-advantaged or tax-sensitive.
By adding to an asset class when it becomes a smaller percentage of the portfolio and selling some of any asset class that becomes too large a percentage, the portfolios are essentially forced to sell high and buy low. This also reduces the exposure to any asset class that has increased in value.
Rebalancing the portfolio on a consistent basis, constantly reviewing the volatility of the satellites, and adjusting the allocation to account for market conditions helps assure you that you do not move outside your original tolerance for risk due to a change in the portfolio’s composition.
Communication with each client is ongoing and frequent. In addition to monthly account statements, clients receive a personalized comprehensive quarterly performance evaluation. The evaluation reviews asset allocation, highlights current and past account performance in light of stated guidelines, and supplies relevant benchmarks against which the client may further measure performance. In addition, the quarterly evaluation graphs the accounts’ risk level and growth since inception.
Investment performance will be reviewed at least annually to determine the continued feasibility for achieving a client’s investment objectives and the appropriateness of the Investment Philosophy Statement for achieving those objectives.
Wells Fargo Advisors does not provide legal or tax advice.
Fees for the PIM program include advisory services, performance measurement, transaction costs, custody services and trading. The fees do not cover the charges and expenses of any mutual funds that may be purchased within the program and customary brokerage charges may apply to non-program assets. Fees are based on the assets in the account and are assessed quarterly. Fee-based accounts are not designed for excessively traded or inactive accounts, and may not be suitable for all investors. During periods of lower trading activity, your costs might be lower if our compensation was based on commissions. A minimum annual fee may apply for this program. Please carefully review the Wells Fargo Advisors advisory disclosure document for a description of our services and information on all fees and expenses. The minimum account size for this program is $50,000.
©2009 Wells Fargo Advisors, LLC 60880 6/09