The standard mindset of most FBB&A’s is to purchase a plain vanilla portfolio and at least on an annual basis review and rebalance the portfolio.  Many advisers concentrate on broad asset classes to allocate money, to purchase their favorite mutual funds or other similar type securities.  Many advisers also consider this type of management as active management, but the reality is this is nothing more than passive management hiding in an active suit.

There could be an approach taken that is much different to conventional dogma

A B&H philosophy based on an investor’s risk tolerance could be done without using some standard, boilerplate model.  A level of analysis should focus on how much risk a client may want to place via equities. Then, drilling down further by asking pertinent questions would allow the determination of the allocation to beta securities versus those that would add alpha.

The beta securities would comprise the purchase of securities that are primarily tied to a primary index (i.e. S&P 500, Russell 100, MSCI Emerging markets, etc.) or a subset of that primary index (i.e. S&P 500 Value Index, International Growth Index, etc.).  The objective is to try and match a market index over the holding period of the instrument.  If the S&P 500 returned 7% in a given year, then the goal is for the portfolio to receive the same returns as the index for that security.

The alpha securities, on the other hand, encompass the purchase of securities to give the investor the opportunity to outperform the market during its holding period.  Examples cover a very wide range from sector ETFs (i.e. S&P 500 Materials Index), theme based investments (i.e. Water Resource based ETF Investments, etc.) to individual stocks (i.e. Coca-Cola, Johnson and Johnson, etc.).  Any portfolio created should be reviewed annually.  Based on the performance of each holding, a decision should be made to replace them, add to or reduce a position.   Advisers should be ready to sell winners if it is determined that they are overvalued and then redeploy the proceeds elsewhere.  At the same time, the adviser should add to winners if they are still considered undervalued.  

Losing issues could suffer the same fate.   That is to sell, add to or reduce a position and then redeploy the proceeds elsewhere.   The goal should always be to focus on the objective of delivering superior performance over the short, intermediate and long-term time periods for the equity asset class.

An actively managed B&H portfolio can be a very viable strategy for the right investor. 

It all comes down to the amount of risk they can handle and the goals and objectives tied to the level of risk they want to assume.  This may be your philosophy but you should review what a risk management investor looks like before making a full commitment to a B&H platform.

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.