The Optimal Mix of Investments
The Focus Partners’ Investment Policy Committee (IPC) helps firms filter the investment universe. The IPC applies a series of stringent checks to narrow the investment landscape — choosing only managers with systematic, rules-based and transparent practices. The IPC recommends primarily using mutual funds and ETFs, along with individual bonds, to build your portfolio. Utilizing these vehicles may be an inexpensive way to gain ownership in thousands of companies and significantly reduce the potential impact of bad news from any one in particular.
Yet, investment selection is never easy. With more than 20,000 funds to choose from, knowing the best option can feel quite daunting. Fortunately, research shows how to better analyze and filter fund managers and their strategies to a more optimal set for your portfolio.
Filtering Your Investment Universe
This selection process uses a methodology to identify investments that best capture the characteristics of our portfolio strategy. Through a multi-layered approach—including evaluating cost and tax-efficiency—it carefully narrows the investment options for your portfolio.
Step 1
Eliminate any funds with hidden loads or 12b-1 marketing fees.
Step 2
Focus on strategies that are broadly diversified across stock sectors and geographic regions.
Step 3
Look for funds that implement sound, intuitive investment strategies.
Step 4
Engage the fund managers in extensive conversations to develop a deep understanding of their teams, best practices and processes.
Step 5
Look for funds that are most effective and consistent at capturing their targeted exposures relative to the costs they charge.
Step 6
Evaluate the tradability of the fund or ETF to ensure resilience in volatile markets.
Trusted Fund Managers
The IPC applies a similar process across all stocks, bonds and alternatives in order to pick the right fund, ETF and Separately Managed Account providers available for your portfolio. This is not a one-time approach. The IPC continually re-evaluates investment providers on an ongoing basis, reviewing whether selections are right for you both today and tomorrow.
Dive deeper into our investment implementations:
The Importance of Keeping Fund Fees Low →
Why Not to Just Chase Recent Winners →
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The Added Value of Keeping Fund Fees Low
According to Morningstar, the average stock fund (or ETF) charges roughly 1.00%. However, the stock portfolios that the Focus Partners’ IPC typically designs for clients tend to cost less.
Over time, those savings add up—as you can clearly see from the chart. The difference in fees can create significant value over the long term.
The IPC compares the cost of the fund to how effective the fund is at allocating to companies that share certain characteristics. This is called Cost Efficiency, and it’s one lens used to evaluate funds used in your portfolio.
Disclosure
For illustrative purposes only. Each portfolio starts with $1 million and grows by 7 percent per year, less the assumed fee. The fee is applied annually at the rate stated. One percent was chosen as that is roughly the average prospectus net expense ratio of all mutual funds and ETFs available in Morningstar as of December 31, 2023. 0.30 percent was used as the types of equity portfolios that Buckingham typically designs for clients typically cost 0.30 percent or less.
Removing Unwanted Risk in Manager Selection
Many individuals and professional investors believe they can pick the next big winner—effectively speculating that the current price of a stock is wrong and that they have better insight into the potential of a company than other investors. However, evidence just doesn’t support that approach.
According to Standard & Poor’s SPIVA® U.S. Scorecard, over a 10-year period only 9% of U.S. stock money managers were able to beat the benchmark. That’s before considering any taxes! Your odds at many casino games are higher.
That’s why the diversifying approach builds portfolios with the idea that a company’s current price is the best estimate of its value. Decades of research has shown that using systematic, rules-based strategies gives you the best likelihood of achieving your financial goals.
Disclosure
Source: S&P Dow Jones Indices LLC, S&P Indices Versus Active Funds (SPIVA®) U.S. Scorecard. Year-End 2023. Data is percentages of outperformance over last 10-years ending December 31, 2023. U.S. Stocks represents the All Domestic Funds category. International Stocks represents the International Funds category. Emerging Markets Stocks represents the Emerging Markets funds category. Intermediate U.S. Government Bonds represents the Government Intermediate Funds category.
Why Not to Chase Recent Winners
Many managers tout their recent performance as a reason to trust them with your financial future. However, even if you can identify an investment manager that has outperformed recently, the probability of them continuing to do so in the future is low. That’s why strategies are judged by how well they are constructed, not their recent performance.
Bond Implementation: Efficient Access to Bonds
When approaching fixed income, the IPC prioritizes high quality, short-to-intermediate-term bonds to preserve wealth and balance other risks in the portfolio. Where appropriate, we may complement this core with high-yield bonds and other sectors. These selections are implemented carefully, and may include using bond funds, ETFs and custom bond portfolios to deliver a cost-effective exposure.
Discover more about the bond approach.
| What You Think When You Hear “Fixed-Income” | What We’re Actually Using |
|---|---|
| Bonds | Agencies |
| Treasuries | |
| Brokered CDs | |
| TIPS | |
| Municipal Bonds | |
| Corporate Bonds |
Focus Partners’ In-House Bond Desk
The bond desk works on behalf of clients to seek out high-quality bonds at the best prices available. Leveraging a handful of key relationships, you benefit from institutional level pricing, reduced bond mark-ups and no held inventory – all with no additional cost to you.
When it comes to optimizing the bonds in your portfolio, the bond desk’s tailored strategies are driven by your needs—not company financial objectives. This keeps interests aligned and offers more flexibility and personalization than most traditional models.
$4.1B
Fixed income traded in 2022
20K+
Fixed income clients
| “Traditional” Broker Model | Focus Partners Model |
|---|---|
| Bonds sold from inventory | Zero inventory |
| Bonds may have significant markups | No ability to mark up bonds |
| Transactional services | Put dealers into competition |
| Suitability standard | Unbiased advice |
| Fiduciary standard |
Implementing The Right Alternatives
Alternative investments offer a unique source of risk and return that tend to provide greater diversification and return potential in comparison to a portfolio only made of stocks and bonds.
With alternatives, the IPC applies stringent sets of criteria, seeking strategies that are transparent, unique from other markets and capture a favorable risk premia to deliver better results.
The IPC remains skeptical of most alternative strategies, but has found a few approaches—like real estate, private lending, and reinsurance —that may benefit a well-constructed portfolio.
Real Estate
Real estate strategies attempt to capture the debt, rents and price appreciation of commercial real estate across the world.
Private Lending
Private lending strategies leverage technological advancements to offer competitive financing to consumers, small businesses and middle-market companies.
Reinsurance
Reinsurance strategies provide predetermined amounts of coverage to reinsurance companies covering against spikes in losses associated with natural disasters such as hurricanes, earthquakes, fires and typhoons.
Style Premia
Style Premia strategies look to capture the difference in return between certain types of stocks, bonds, commodities and currencies in a rules-based, systematic manner.
Disciplined—Designed for You
Your wealth is important, so there’s never a one-size-fits-all approach. Work with your advisor to find the right investments that are best suited to the strategy you outline together.
Sometimes investments can seem complicated, but with our diversifying approach, a portfolio can be developed that you can stick with through all kinds of market cycles.
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