Market Expectations and the Macro Environment
Investing requires forming expectations about the risks and rewards associated with the outlay of capital. In fact, the most important macro decision an advisor makes, whether or not to invest at all, requires weighing the expected benefits of investing against the risks of investing. Two key aspects of economic expectations involve the importance of investor expectations and the macro market variables that produce those expectations.
We believe there are two distinct and different needs for expectations in the investing process. The first involves the needs of the investment manager, whose job it is to correctly evaluate the return and the risk potential of the individual securities as well as the risk/reward position for the market as a whole. The traditional investor has concentrated on returns. Their typical thought is, “How much can I make in this stock or this market”. We believe this line of thought to be incorrect. Risk should always be the main concern in any type of investing. Any investment we make will always be evaluated first from the risk side. If the risk is not acceptable, the investment will not be made.
The second involves the needs of the individual investor, whose job it is to be educated in investing and understand the inter-workings of the market. Often, investors have unrealistic expectations of the markets and are only in search of the “fountain of youth”. Make no mistake about it; the domestic markets are among the strongest in the world and we feel offer exceptional promise at any given time. But, the markets are also long-term in nature and apt to go thru somewhat drastic fluctuations. At Delta Advisory Group we do a great deal to educate our clients. We realize that you have a full time life and that’s why you’ve entrusted us with investing on your behalf. However, we also want you to be fully aware of what’s happening in the portfolios and the markets. Our goal is to not only investor for you but to also educate you in the process.
Monitoring and Rebalancing the Portfolio
Even carefully crafted portfolios can’t run themselves. We are investing in ever-changing capital markets, thus changes will be made. Investment managers are not architects, who erect a structure then leave its denizens to their own devices. Instead, they reside with the client, making revisions when circumstances demand it. Change is the only true constant, working inexorably to alter client circumstances, market risk attributes, and securities’ return prospects. The continual charge of Delta Advisory Group is to monitor these changes and respond by rebalancing portfolios to accommodate them.
There are a myriad of factors that would suggest some type of rebalancing in a portfolio. From the side of the investor, an important change in your financial condition or objectives would demand that rebalancing be considered. Examples include; a change in wealth, changing time horizons, changing liquidity requirements, laws/regulations and tax circumstances.
From our perspective, changes in the markets’ risk attributes or in return prospects for individual investments may also lead us, as your portfolio manager, to act. Under this type of scenario, there are three primary types of revision we would look to make in the portfolio:
We may adjust the asset mix by selling overpriced or over weighted individual issues or classes & reinvesting in others.
We may alter investment emphasis within sub portfolios. Two examples are changing the duration (or variability/aggressiveness) in a fixed-income sector or adjusting the style (growth vs. value) of the equity portfolio.
Finally, our incentive may simply be to upgrade an individual issue for one that seems to offer better value.
Attainment of Investor Objectives and Performance Measurement
The purposes of performance management are pretty easy to see. As an investor, you want to identify skill at your portfolio management firm, to provide evidence that favorable performance coincides with the investment skills that were touted by your advisor and to monitor the investment strategy that has been developed based on your particular objectives. From our standpoint, performance management will provide needed feedback concerning whether results coincide with expectations.
The basic purpose of all rate of return calculations is to account for changes in asset value plus dividend or interest income plus realized capital gains or losses. These changes are then expressed as a percentage of initial capital value, adjusted for net contributions or withdrawals. Delta Advisory Group, time-weighted rates of return are used in performance measurement because they minimize the impact of external cash flows – over which the portfolio manager has no control – on the rate of return calculation.
We are always able to run performance measures for our clients and feel that this is crucial in the investment process. As well, we will furnish this information on request. For accuracy of the computation, we feel performance measurement should be computed as often as practical, but results should not be taken as significant by the investor or the investment manager until a reasonable period of time – such as a market cycle for equities or an interest rate cycle for fixed-income securities – has elapsed.