How does Marquam Capital manage client assets?

We manage our clients’ assets using tactical and strategic asset allocation supplemented with alternative assets such as private placements and individual equity ‘value’ selections. The majority of each client's portfolio is invested using our asset allocation model. The remainder is invested with the goal of adding ‘alpha’ to the portfolio while keeping risk within the bounds of the investment policy.

Our investment approach is designed around the client and is managed primarily through a highly diversified portfolio of institutional-quality mutual funds. We can modify clients' portfolios to incorporate additional ethical screens while remaining within the investment policy.

What factors does Marquam Capital consider when creating each client's investment policy?

We create a personalized investment policy in consultation with each client to ensure we have a full understanding of each client's investment objectives and needs. We look at the client’s age, time horizon, income, investable assets, other assets, financial needs and risk tolerance to create a detailed statement of investment policy. This investment policy provides the framework within which we create a long-term strategic asset class allocation.

We understand that circumstances change over time and we want to ensure that we are working with a current understanding of each client's needs and objectives. In addition to quarterly performance reviews, we like to meet with each client at least annually to review and revise the investment policy to ensure it is still appropriate.

What is an asset class allocation?

An asset allocation describes the relative weighting of investment between several general asset classes. We focus on the following asset classes:
• investment grade bonds,
• emerging market bonds,
• large-capitalization U.S. equities (value, blend and growth),
• small- and mid-capitalization U.S. equities (value, blend and growth),
• international equities, and
• other assets (REITs, long-short equity, commodity futures)

The asset class allocation of each client will be determined when creating and reviewing the client's investment policy. Clients with a shorter time horizon for their investments (e.g. for the down payment on a house, college tuition for a child or retirement) will have a higher weighting in fixed income asset classes to ensure capital preservation while clients with a longer-time horizon and/or a higher risk tolerance will have less exposure to fixed income and more of their portfolio invested in equities with higher long-term (trend) growth.

What is the strategic allocation?

The strategic asset allocation is the baseline allocation across asset classes and is included in the investment policy. Occasionally we see tactical allocation opportunities created by the relative over- or under-valuations of an asset class. When these opportunities arise, we will take advantage of them to the degree we feel prudent considering the client's investment policy. Because we make tactical investment changes, the portfolio may not be invested in the exact proportions specified by the investment policy. In order to limit too much movement away from the investment policy, the investment policy specifies a band around the strategic allocation in which tactical changes can be made.

What is the tactical allocation?

The tactical allocation refers to investment changes away from the baseline strategic asset allocation caused by a significant change in the relative valuation of different asset classes. For example, if we believe that large-capitalization U.S. equities are relatively overvalued relative to other asset classes and emerging market bonds are relatively undervalued relative to the market, our tactical change would be to sell a portion of the holdings in large-capitalization U.S. equities and use the proceeds to purchase emerging market bonds. This would leave us with a lower allocation in large-capitalization U.S. equities (relative to the strategic allocation) and a higher allocation in emerging market bond funds (relative to the strategic allocation). When we look at relative valuations, we wait for valuations to move enough to create what we believe are ‘fat pitch’ tactical allocation opportunities. We also monitor the asset allocation in each portfolio to ensure they do not move outside of a band around the strategic (long-term) allocation as set down in the investment policy.

How is the asset class allocation implemented?

We implement our asset class allocation using institutional-quality mutual funds. By using mutual funds we are able to provide clients with significant diversification not possible for most account sizes if we were selecting individual equities. Additionally, by finding fund managers whose investment strategies are in line with our own, we can draw on their in-depth knowledge and experience within asset classes. This allows us to focus our attention towards a review of relative valuations of asset classes and due diligence on mutual funds to ensure they invest in a way that will provide our clients with the best long-term performance. When reviewing mutual fund managers, we look at past performance versus comparable funds and benchmark indices, investment strategy, the quality and tenure of the fund management, and expense ratios.

What is the difference between retail and institutional classes of mutual funds?

Mutual funds often come in several different classes, all with different expenses and fees, but representing shares in the same underlying assets. Some mutual funds offer institutional shares which typically carry lower expense ratios than the retail shares, but which are limited to large institutional investors with a substantial amount of money to invest. Our custodian TD Ameritrade Institutional provides us access to these institutional funds with a far lower minimum investment. This provides our clients with access to lower-expense funds, increasing the returns compared with the identical retail shares that carry higher expense ratios.

Who can participate in private placements?

Generally, private placements in which our clients participate are only open to accredited investors as defined by Rule 501 of Regulation D of the Securities Act of 1933.

What are individual equity ‘value’ selections?

Although the bulk of portfolios will be invested in a well diversified mix of mutual funds, we will also select a few companies’ equity to complement the portfolio allocation and potentially add ‘alpha’ (excess performance compared with a neutral benchmark) to the portfolio returns. The equities will be selected for their ‘value’; that is, we look for companies that are fundamentally sound but are not in favor in the market so their price is depressed to level we consider a ‘value’.

How does Marquam Capital include ‘ethical’ screens in your asset allocation model?

An ethical screen does not change the investment strategy we use; it only changes the universe of investment options from which we choose. The main difference between our standard investment approach and one that embodies an ethical screen is that it requires us to perform additional due diligence when we select equities and mutual funds. This due diligence ensures that in addition to following the investment policy from a financial perspective it also fulfills the investment policy from an ethical perspective.

For example, if we were modifying our investment model to incorporate a ‘green’ screen that excludes companies that are not environmentally sustainable, we would take our tactical asset allocation model created by assessing the relative valuations of different asset classes and replace the funds included that do not screen for environmental sustainability with funds that do.

When we search for alternative funds that incorporate ethical screens, we use the same methodology for finding funds that will best meet our clients’ investment objectives. We pay close attention to past performance versus both comparable funds and benchmark indices, the fund’s investment strategy, the quality and tenure of the fund management, and expense ratios.

Occasionally we may not be able to create an investment strategy that fits both the investment policy and our asset allocation model using only mutual funds. In this case, we may supplement mutual fund selections with individual equities that complete the gaps between mutual funds. We are always careful to ensure that we find the highest quality companies and work to avoid overpaying for them. Our analysis is mindful that individual equities are not as diversified as mutual funds. We will ensure the overall portfolio is well diversified and the inclusion of individual equities does not create significantly greater volatility than a comparable portfolio composed entirely of mutual funds.

What type of ‘ethical’ screens are you able to incorporate?

The most common screens are for ‘green’ and ‘socially responsible’ investments. We are also able to customize portfolios in accordance with other screens on request.