Nvest Wealth Strategies Process: Our Investment Philosophy
Goals
- Deliver exceptional risk-adjusted performance over time
- Invest in asset classes with fat-pitch opportunities
- Utilize a long-term, diversified asset investment approach
- "Time In the Market" rather than "Timin’ the Market"
In Pursuit of Stated Goals
- Macro-economic research (top-down) is ongoing and foundational for the tactical asset allocation process.
- Monitor and identify asset classes that are undervalued, or have exceptional opportunity to outperform the broad market. These asset classes are the fat-pitch opportunities. Markets are viewed to be semi-efficient implying that active management will add return and reduce risk when compared with passive investment strategies.
- Tilt slightly away from a style neutral asset allocation strategy when projected economic trends and fat-pitch opportunities can be identified (themes tend to run 2 to 4 years). When no such opportunities are present, a style neutral asset allocation is utilized.
- Select mutual funds and investments that should do well given economic and performance expectations.
- Identify best mutual funds in each style category using both quantitative and qualitative factors
- Identify managers with strong historical performance, the product of a compelling investment (buy/sell) discipline.
- Evaluate fund tax efficiency; fund operating costs
- Portfolios are managed by predetermined allocations of asset and fund mix.
- Rebalancing occurs by selling above-target exposures and/or buying under-target exposures.
- Mutual funds are sold order to raise cash for client needs or when more compelling investment opportunities arise.
- Funds are compared with their style peers. Underperforming funds are sold due to significant style drift, investment team changes, or governance concerns.
- Patience is utilized with a manager who is experiencing sub-par performance while still pursuing their investment process. Continual peer comparison occurs for possible replacements.
A Diversified Asset Investment Approach
Nvest Wealth Strategies invests client portfolios through a "Diversified Asset Investment approach". Portfolios are constructed using no-load mutual funds with the primary goal of constructing a diversified asset mix that takes advantage of the upcoming investor climate, reduces overall portfolio risk, and provides an attractive rate of return.
Research
The first step in the investment process is top-down research, beginning with the macro-economic environment and funneling down toward sectors. Much research is performed and reviewed in order to fully assess and understand the macro-economic environment for the past, present and future direction. This is the starting point for determining our tactical asset allocation, and serves as the basis behind for any style weighting that may be deemed an opportunistic shift slightly away from style neutral (neutral implying roughly equal asset allocation among large/mid/small cap and value/blend/growth).
Sector Analysis
We seek to identify themes that we believe will prevail in the market for the long-term (at least 2 years) and make tactical adjustments accordingly. Sectors are analyzed with respect to the research that has been gathered and conclusions that can be drawn from economic data, forecasts and projections. The broad economic environment can tell us a great deal about which asset class style boxes (large/mid/small and value/blend/growth) is currently, or looks to be more favorable than the overall market given the economy and current asset class style valuations. Much like individual securities, the market too goes through phases in which certain asset class styles become overvalued (undervalued) relative to economic outlook and cause other styles to conversely become undervalued (overvalued). We look to stray from style neutral and focus some additional weight to specific sectors only when we can identify styles that are undervalued with respect to current valuation in consideration of the economic outlook; these are the valuation opportunities analogous to a baseball hitter’s "fat pitch".
Fund/Manager Identification and Selection
After determining the proper mix/recipe of assets styles that will be used for various portfolio objectives (taking into account the research and sector analysis), funds and fund managers that focus on the asset class style box of interest are identified. Nvest Wealth Strategies strives to pick the funds and managers that are among the best in their respective sectors to satisfy our allocation objective. Funds and fund managers are identified among the best on the basis of many quantitative and qualitative factors, which consist of some (but not necessarily all inclusive) of the following.
| Quantitive | Qualitative |
| Volatility (risk) | Buy/Sell Discipline |
| Historical Performance | Manager Tenure |
| Fund Ranking | Investment Approach |
| Sector Exposure | Phone Conferences |
| Asset Turnover/Churn | Political Views |
| Expense Ratio | Governance |
| Capital Gains History | |
| Diversification |
Allocation and Buy/Sell Discipline
Funds and fund managers are "bought" in accordance with the market’s "fat-pitch" opportunities with the intent to hold the investment for the long-term. When no fat-pitch opportunities are identifiable, a "style neutral" mix is utilized as we believe that it is an investor’s "time in the market" rather than "timin’ the market" that is the primary component of asset growth over the long term. When a fund or sector’s price appreciation results in allocations that are no longer "balanced" in accordance with our determined allocation recipe, a portion of an overweight fund may be sold, using the proceeds to shift the allocation back in-line with our prescribed asset allocation. From time to time it may become necessary to sell out of a fund that is consistently performing poorly. Generally, a single period or two of poor performance does not warrant the sale of a fund entirely. The sell discipline is typically patient, unless a key component of the fund has changed in principle (a key manager leaves or the fund’s investment process and/or strategy has evolved into one that no longer fits with our economic view).