KTA PRINCIPLES FOR INVESTMENT PORTFOLIO DESIGN

KTA Principles for Investment Portfolio Design

Our core principles provide the framework to assist our clients in meeting their financial goals. At Kistler-Tiffany Advisors, our philosophy for developing customized client investment portfolios is guided by three core principles:

  1. We believe in creating a style-neutral strategic asset allocation for our clients that incorporates several factors, including: the client's risk tolerance, time horizon, and financial planning objectives.

  2. Our asset selection follows a core-satellite approach that combines passive market-oriented investments with actively-managed funds.

  3. We aim to keep the overall cost of our portfolios low in an effort to maximize returns relative to our clients' objectives. 

Benefits of Asset Allocation

Asset allocation is a dominant factor in determining total portfolio return and controlling risk. Studies have shown that 93.6% of a portfolio's performance is due to its strategic asset allocation.[1] Investment styles (i.e. Growth vs Value) move in and out of favor as the economy evolves through business cycles. Correctly predicting an economic cycle over time is a difficult task for even the most seasoned economists and investment managers. By using a style-neutral strategic asset allocation, we balance our portfolios across various asset classes and styles instead of trying to anticipate the course of the economic cycle. To further control risk, we systematically rebalance portfolios back to our clients' strategic allocations as performance moves these portfolios outside of the original allocations. Thus, we aim to reduce overall portfolio volatility in an effort to earn more consistent returns over time.

Portfolio Construction

Our portfolios are constructed with a low-cost, passively invested core that provides broad market exposure. The core is complemented by actively-managed satellite positions, which have the goal of outperforming the market. Since passive index funds are certain to trail their benchmarks by the cost of the fund, we believe there is still evidence to support the role of active management in client portfolios.

We value the following characteristics when selecting the assets for our core allocations:

Core - Exhanged-Traded Funds (ETFs)

  • Passive - track a benchmark of selected securities
  • Low-Cost - costs of passive investments are typically lower compared to active investments
  • Identifiable - components of the index are known and can be easily tracked

We value the following characteristics when selecting the assets for our satellite allocations:

Satellite - Active mutual funds, sector ETFs, and individual stocks

  • Active - seek to outperform a selected benchmark
  • Low-Cost - low relative to actively-managed peers
  • Proven Management - identifiable strategy with a proven track record

The satellite positions are included to compliment the core. These positions are intended to improve value by outperforming their respective benchmarks. Over time the satellite positions are expected to increase risk-adjusted portfolio performance.

Low Cost

Costs play an important role in our investment choices. We believe low costs will give our clients' portfolios a greater chance for improved investment returns. Research suggests that lower-cost investments have consistently outperformed higher cost alternatives. We do not want fund expenses to act as a drag on returns since higher costs can significantly depress portfolio growth over long periods. This is why we focus on building cost-efficient portfolios. In the end, we believe our emphasis on managing cost will help achieve investment success.

We focus on:

  • Extensively researching and comparing investment expenses to keep fees low in portfolios
  • Adding passive investments to portfolios as useful tools for cost control

 

 

 

 


Footnotes

[1] Larrabee, D. (2012, February 16). Setting the Record Straight on Asset Allocation. Retrieved June 06, 2016, from https://blogs.cfainstitute.org/investor/2012/02/16/setting-the-record-straight-on-asset-allocation/

 

References

Rekenthaler, J. (2014, August 25). Active Versus Passive Is the Wrong Question. Retrieved June 06, 2016, from http://www.morningstar.com/advisor/t/96006915/active-versus-passive-is-the-wrong-question.htm

"Fund Expenses---A Very Slippery Slope" by William Bernstein, 1999. http://www.efficientfrontier.com/ef/799/expenses.htm

Kinnel, R. (2016, May 05). Fund Fees Predict Future Success or Failure. Retrieved June 06, 2016, from http://www.morningstar.com/advisor/t/115098857/fund-fees-predict-future-success-or-failure.htm

 

 

OUR MISSION: Kistler-Tiffany Advisors strives to provide personalized asset management and estate planning services to individual clients and their families with complex financial needs

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