DIAS™ tactical investment strategies are based on the principle that, for consistent investment performance, actively allocating capital to the most attractive, risk adjusted asset classes—while avoiding the least attractive areas—may be more effective than attempting to select the historically “best performing” stock or bond manager or mutual fund. In our opinion, the most important part of investment management is deciding how much capital to allocate to each asset class and, often more importantly, which asset classes to avoid.
Our investment philosophy is a truly diversified approach that adapts to market and economic changes and has the flexibility to dynamically invest across a wide range of asset classes. DIAS™ aims to “tilt the odds” in the favor of the investors by gradual and progressive asset allocation changes together with disciplined risk management.
A Smoother Investment Ride
A smoother investment ride may be achieved by targeting upside participation during times of capital appreciation while limiting downside losses when markets offer little opportunity for gain.
Many “liquid securities markets” tend to experience ups and downs in repeatable cycles, as shown in the hypothetical diagram below. Often these cycles are driven by emotional factors, such as investor exuberance or capitulation.
An important component of the DIAS™ investment methodology is the exploitation of these “human factors.” When prices reach new highs without clear support from our research data, we have a tendency to sell those holdings that appear to be the most overvalued, thereby locking-in profits. Conversely, when panic selling appears to be unjustified by hard data, expect our portfolio managers to be searching for temporarily discounted assets to add to our portfolios.
Dynamic diversification seeks to actively move between the market cycles of different, non-correlated, asset classes in an attempt to avoid those regions whose cycle is causing the majority of prices to fall, while participating in sectors where the cycle is in a positive phase. The goal is to provide consistent, lower volatility returns by combining the returns of various asset class cycles moving in different directions, as shown in the accompanying hypothetical diagram.
Although DIAS™ generally involves diversification across a greater number of asset classes, sectors and geographical regions than those found within traditional single asset class portfolios, for example large cap growth or fixed income strategies, the accompanying diagram illustrates how smoother returns may be generated in the simple case of just two asset diversified classes. Most investment philosophies concur that risk may be reduced by combining different asset classes, each with their own specific correlation characteristics. In other words, don’t put all your eggs in one basket. Comprehensive diversification cannot guarantee to eliminate loss of capital; however, it can reduce the probability of excessive declines in portfolio valuation.
In this way, smoother, less volatile investment returns may be possible for those investors who require more consistency.
To use a baseball analogy, we focus on consistent singles and doubles— not home runs.
For our conservative investors, we were able
to generate full-year positive returns1 in both 2008 (Credit Crisis) and 2002 (end of Dotcom bubble). These two years and periodic corrections in a number of markets, validate our focus on Capital Preservation. Risk management is at the core of our management philosophy.
The aim of asset allocation is not to chase excessive returns in good markets, only to then suffer severe declines in bad markets. We seek to balance risk against the potential for reward.
DIAS™ is a disciplined methodology which emphasizes investment quality when approving securities for inclusion in our portfolios. Once we identify a prospective investment, we research the underlying credit quality, balance sheet stability and trading liquidity as our primary measures of investment quality.
1 There can be no guarantee that DIAS™ portfolios will generate a positive return. During 2008, the Conservative Income portfolio experienced intra-year
losses to investor capital.
An Income Bias
The DIAS™ investment philosophy may use investment income as a risk management and capital preservation tool. The generation of regular income can protect asset values in bear markets—the income received reduces the effect of any fall in the value of an investment—while adding to investor returns during bull markets.
We often compare our income portfolios to owning a diversified portfolio of high quality rental properties, occupied by stable, profitable tenants. Although DIAS portfolios rarely allocate significant capital to property, such a hypothetical portfolio would ideally produce a consistent income stream from which you can continually draw. The price of the properties would be secondary to the consistency of income providing the investor with a level of comfort and sustainability throughout periods of price volatility. In this theoretical example, falling property prices may be an opportunity to increase the
We believe, now more than ever before, that during periods where asset appreciation is difficult to find, income could be the primary solution to fund our clients’ financial and lifestyle needs.
We define “diversification” as lots of different eggs in lots of different baskets
The internal costs associated with running a portfolio can dramatically reduce returns, especially in times of flat or falling markets. Trading costs, internal fund expenses and taxation are all considered when managing DIAS™ portfolios. Unlike many Mutual Funds, DIAS™ portfolios are held in separate managed accounts which do not participate in marketing, platform and other fees.
Actual investment costs and taxation will depend on the specific circumstances of each individual investor. A Global Wealth Management Advisor is available to discuss your personal situation.2
2 For detailed tax advice, please consult a qualified tax professional or Certified Public Accountant (CPA).
Institutional Levels of Diversification
Large institutional funds, college endowments and public retirement funds commonly invest across a wide range of asset classes, regions and types of security. They seek participation in those areas which are undervalued or potentially approaching a rise in value. Their goal is consistency in achieving target returns.
The DIAS™ management approach looks to participate across similar levels of
diversification as a means to generate income or capital gain within a wide range of economic environments.
Retail investment options offered by large brokerage organizations tend to result in a limited investment selection for clients which are weighted heavily towards stocks and bonds.
Investment Choice Matched to Your Needs
DIAS™ portfolios can be mixed and matched to create a solution designed to meet your specific income, capital appreciation and volatility goals. Our aim is to manage your lifetime savings with both your financial and risk-comfort requirements in mind.
If the returns of your current investment manager often appear to mirror the ups and downs of the general stock market, or you are constantly being asked to “wait for things to come back;” now might be the right time to consider talking to a Global Wealth Management Advisor about the DIAS™ investment approach.
Achieving an income level that meets your goals can therefore free you from the constant worry that comes with the need for prices to go up in order to maintain your lifestyle objective.
INCOME: THE RENTAL PROPERTY ANALOGY
We often compare our investment methodology to owning a portfolio of rental properties.1 The first consideration for such a portfolio might be the search for, and selection of, quality properties in attractive neighborhoods with financially secure tenants. You would look to acquire these properties at a “good price” which would provide an attractive level of income and the potential for the property values to appreciate at some unknown time in the future. Ideally, this property and portfolio would produce a consistent rental income stream cash you can use for living expenses.
Now, imagine you hear the price of property is falling and your portfolio is now worth less than it was just a few months ago. As the primary objective of your property portfolio is income, you probably wouldn’t worry too much about this decline in value—providing the properties are still in good condition and the tenants remain financially sound.
In fact, a drop in property prices may be an opportunity to review your portfolio with opportunity to pick up undervalued property and thereby generate higher income. This is possible because, if the price of an income producing investment drops while the income remains the same in dollar terms, your income levels (yield) will increase as a percentage.
1 This is a hypothetical description intended to provide an insight into the income benefits and holdings quality of the DIAS investment philosophy when applied to income portfolios. DIAS Portfolios typically contain liquid securities traded on U.S. exchanges and covering a wide range of asset classes. Although these portfolios may periodically contain a small percentage exposure to property values, it is rarely a significant asset class.
NAVIGATING VOLATILITY & PRESERVING CAPITAL
Income investing is a journey with a long-term percentage yield as your destination. Sometimes the ride is smooth; sometimes it can get bumpy. We believe our job in managing income-generating portfolios is similar to that of an air traffic controller. The goal of an air traffic controller is to keep a number of planes in the air and as close as possible to a planned flight path while avoiding turbulence and storms. Think of each asset class we allocate capital to as an aircraft flying through the sky. Income is only produced if the aircraft is in the air. We actively manage the path of these asset classes, and the investments contained within to avoid the turbulence our research suggests may be approaching. If an asset class gets too turbulent, we’ll sell it and move to a calmer region or move to cash until brighter skies approach. If we feel the turbulence is temporary, we’ll prepare our investors and portfolios for a bumpy ride. We can’t promise to avoid stormy markets, but we do try to keep the income flowing throughout the journey.
DIVERSIFICATION: BONDS ARE NOT THE ONLY SOURCE OF INCOME
Today’s global markets offer a wide range of income opportunities. At Global Wealth Management, our goal is to construct portfolios which benefit from diversified income streams. Diversification across non-correlated asset classes may increase yields and reduce your exposure to significant losses.
When you make income your primary investment objective, a number of things can change. Short-term price volatility should be less worrying because your investments are paying consistent income. The income generated from a Global Wealth Management portfolio can be taken and used to cover your expenses without disrupting the underlying investment portfolio. Alternatively, it can be reinvested to increase your portfolio value.
Price gyrations may be less of a concern to you as an income investor because you no longer need to rely on prices going up to fund your lifestyle. When markets become volatile, the most important concern becomes: “Will the company behind the investment still be paying income in five years’ time?” instead of “My principal has fallen and I need to sell into a down market.” Income often provides the conservative investor with a comfort factor in difficult markets.
If asset prices going up and down represents your Investment Pain, receiving regular income is your Investment Gain.
If Global Wealth Management via its RIA Aviance and Global Financial Private Capital can manage a portfolio that produces a desired income level, chasing capital gains by taking on more risk may become unnecessary. In challenging markets, we may even reduce income levels temporarily in an attempt to reduce risk and preserve principal.
When the price of an income-paying security falls, the percentage income level (the yield) increases. Purchasing at this lower level “locks-in” the higher yield and opens the possibility of increased portfolio yield and capital appreciation. 1
Portfolio yield provides a foundation of income which can be added to any risk-adjusted gains, if and when such gains are periodically available.
At some stage in life, you may need your investments to provide income which covers your living expenses.
When this time comes, is it wise to continuing focusing on investment growth? When income is something you rely upon, consistent investment yield with an element of capital preservation may be more appropriate.
1 Dividends payouts can rise, fall or be suspended. They are regularly subject to the review of their continuation by the Board of Directors of the issuing company.
*DIAS portfolios are designed to meet stated investment objectives based on a client Investment Policy Statement (IPS). They are not designed to match equity market returns during strong rallies. Although the portfolios seek low volatility and principal protection, asset allocation deci¬sions may not achieve these goals in all cases. There is no guarantee a portfolio will meet a target return or investment objective. Investments in bonds involve interest rate and credit risk. Bond values change according to changes in interest rates, inflation, credit climate and issuer credit quality. Interest rate rises will reduce the value of a bond. Although longer term bonds may pay more income, their value is more susceptible to interest rate variation than shorter term, lower yield bonds. Stock markets and individual stocks may be subject to large price fluctuations. Diversification can not guarantee to protect an investor from these fluctuations. The use of indexed funds is not fully guaranteed to track an intended market and may carry additional ‘product’ risks. Chris Bertelsen is Chief Investment Officer of Aviance Capital Management, LLC an affiliated SEC registered investment adviser. Aviance manages the DIAS portfolios as a sub-adviser to GFPC. DIAS investments are made on U.S. exchanges; however, Non-U.S. investments, Currency and Commodity investments may contain additional risks associated with government, economic, political or currency volatility. Emerging market investments can experience high volatility and risk. Different investments involve varying degrees of risk. Aviance Capital Management, LLC is an institutional money management firm and acts as a sub-advisor to Global Financial Private Capital, LLC. Aviance Capital Management, LLC is a registered investment advisory firm. Aviance Capital Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®). To receive a list of composite descriptions of Aviance Capital Management, LLC and/or a presentation that complies with the GIPS standards