Models
|
How A Model Is Created From Start To Finish
How A Model Makes A Selection
How a Portfolio is ConstructedPlatform SelectionAsset Identification: Where are the assets currently held? One of the strongest attributes of this program is how the technology works with many different investment platforms. This allows the Advisor to be flexible in the decision of what platforms to use for various clients. Additionally, it reduces the need to transfer assets from one platform to another. This helps to activate management quickly and efficiently, while reducing or eliminating transfer costs. However, while our technology is flexible to accommodate many platforms, some custodians contain restrictions that can limit the amount of models to be used on their platform. Therefore, in circumstances where a platform contains trade limitations or other restrictions the Advisor can make an informed decision as to how to make the best use of the Model Technology. Start with An ObjectiveInitial search: Advisors often have a preconceived objective for a desired risk/reward portfolio. Experience has shown that the best portfolios are typically composed of 9 or 11 models. Why 9 or 11? What's significant about that range of models in a portfolio? We believe the market is efficient in its daily pricing of securities. We also believe that asset allocation plays an enormous role in both appreciation and depreciation of a portfolio due to general trends within various sectors of the market. Therefore, we subscribe to an active review of investment pricing, while diversifying the holdings of those securities to multiple asset classes in amounts up to 9 or 11 positions per portfolio. We believe in order to achieve returns that are desired by most public customers, we need to have a certain level of concentration of asset classes. The intent of investment concentration is to allocate assets in positions showing current strength with the expectation of continuing appreciation while being invested in those positions. In moving to strength with concentrations of assets of 9 or 11 positions, we hope to out perform traditional asset allocation and other benchmarks or indexes that display similar risk characteristics. We have performed multiple studies internally that evidence that using fewer than 9 models can create too much concentration into one or two sectors at any given time, thereby raising the risk of a portfolio; while having more than 11 models creates, in our opinion, unnecessary diversification that relegates a portfolio to perform in tune with broad market movements that may not bring any additional value to the portfolio management process. Another significant characteristic about the 9 or 11 that you may have noticed is they are both odd numbers. We believe the odd number of models helps to “break the tie” much like the configuration of the US Supreme Court, which consists of 9 justices. When the markets are fluctuating and there does not seem to be any clear direction between growth oriented positions or defensive instruments, like bonds, the odd number of positions often helps to offset the allocation in a way that lends concentration to one direction or the other. This concentration acts as a tipping point within the portfolio and is geared to help the portfolio work through periods of market trepidation. When the models are split between allocations of growth or defensive positions, there will be at least one model that will cause the tie to be broken by its selection. (Example: 5 models are currently allocated to growth positions versus 4 models that are allocated to bond positions; in this case the growth positions have the majority allocation.) This style of asset selection can aid Advisors when posed with difficult decisions as related to the direction of the market. The odd numbered models will not always be correct in their assessment, but they serve as one more tool that an Advisor can call upon to aid them in their daily management decisions. We believe this same principal helps the models to break the tie in cases where multiple asset classes are looking like the strongest current position. By having one model continuously moving toward what appears to be the strongest current position, it may create additional value for the Advisor making decisions on behalf of the portfolio. Test Different Mixes Of Model Risk CategoriesAdvisor's Unique Selection Process: Upon identifying the platform and objective for a desired portfolio, the Advisor can search the available models and begin construction of the portfolio. The construction phase encompasses matching models of different characteristics (conservative, core, moderate, growth) and then testing those mixes with historical market data to evaluate the portfolio's ability to handle multiple market cycles. The Advisor is also trained to focus on investment overlap to help make sure that the portfolio maintains a level of diversification. Like traditional investing we do believe diversification is paramount to help defend a portfolio from too much concentration in one sector. Portfolio CompletionAdvisor Accepts Portfolio: If a portfolio displays the characteristics that an Advisor deems appropriate, then they will save the portfolio and be able to run signals on that portfolio. A sample portfolio may have the following characteristics: In this example, each model acts independently of the other, selecting one investment at a time; rendering 9 individual positions that comprise the overall portfolio. Each position in a 9 model portfolio represents approximately 11 percent of the total value of the overall portfolio. The following chart is an example of a 9 model portfolio that shows various asset classes that could be selected by the models. The chart does not represent any account and is not a static allocation recommendation. 
Investment Allocation Transition To Portfolio PositionsAdvisor's decision to activate management: As discussed earlier, these models work independently of each other and have separate characteristics including minimum holding periods. The data provided by the models help the Advisor make informed decisions concerning holding periods and asset allocation. When additional contributions are added to an account it presents the need for an immediate decision by the Advisor. Should they allocate the entire portion of available assets to the current or existing portfolio positions or should they wait for the next model signal to trade to get in sync with the model positions. (Example: Growth Model 1 has a 95 day minimum hold. We are currently 75 days into that minimum hold. Should the Advisor buy the current position knowing that a trade may happen in the next 20 days or should the Advisor wait in cash until the next trade signal that will start a new 95 day minimum hold? A common decision is to wait the 20 days to see when the next trade will be executed. However, there's no assurance that Growth Model 1 will trade on the first day outside the holding period. Once a model is out side the minimum hold period it can sell at any time, but if the current position is still the strongest place to be, the position will be maintained until the model identifies a stronger place for which to allocate.) The main premise we wish to convey is that the Advisor is the biggest and most valuable resource to this program. They have a lot of responsibilities regarding the daily maintenance, understanding and implementation of the investment research. This system is a process of long term investing with intermediate term evaluations that allow the advisor to perform daily reviews of new market data. |
|
 |
||
 |
 |
|
Computer based testing helps test robust nature of investment group.
