Non-Discretionary Consulting Services In A Conflict-Free Environment
As a decision-maker regarding your institutional investments, you understand that there are key differences between investing as an organization and investing as an individual. As an organization, you may have unique tax concerns. Liquidity may be a high priority. You could have a varied set of financial objectives and a wide range of risk concerns.
At Johnston Investment Counsel, we specialize in helping smaller institutional clients minimize risks and reach their investment goals. We work with many institutional clients, including corporations, defined benefit and defined contribution plans, endowments, foundations, hospitals, and various not-for-profits. We work with institutional clients on either a full-service retainer or per-project basis.
- Investment Policy
- Asset Allocation
- Portfolio Diversification
- Portfolio Construction
- Manager Selection
- Performance Measurement
Things can change quickly in both the investment world and in organizational leadership. Economic conditions can change. Your organization’s goals and needs may change. Your investment committee members will almost certainly change over time.
During this constant change, your organization still needs to stay anchored to its core principles and values. An investment policy statement is that anchor. It provides continuity in approach and strategy so you can maintain a consistent long-term vision in the face of consistent change.
While investment policies are customized for each institutional client, there are some common areas that are generally found in every investment policy statement that JIC creates. The include:
- Purpose and background
- Goals and objectives
- Delegation of responsibilities
- Review procedures
- Define overall portfolio philosophy, strategy, and appropriate risk level
- Define the asset allocation ranges and rebalancing strategy
- Selection criteria for investment managers
- Investment objectives, guidelines, and restrictions
- Performance and risk benchmarks
There’s no shortage of varying opinions and conflicting advice in the investment world. However, most financial experts all agree on one thing: asset allocation is the single most important factor in determining your portfolio’s future return.
It’s critical that your asset allocation is in alignment with your investment objectives and your tolerance for risk. If it isn’t, you could outcomes that are well outside your set of expectations.
How does JIC create the right allocation for you?
We start with conversation. We do a lot of asking and listening so we can thoroughly understand your goals, objectives, and concerns. We then use a combination of quantitative and qualitative assessment to evaluate the potential return and risk associated with different allocations.
In our quantitative review, JIC creates a customized financial model to evaluate the short-, intermediate- and long-term impact different asset allocations may have. JIC’s qualitative analysis is designed to help us better understand your unique views about risk taking and your willingness to accept portfolio fluctuation. We then combine the results of those analyses to determine the ideal allocation.
Asset classes are broad categories of investments such as stocks, bonds, and cash. Portfolio diversification determines how assets should be diversified, not only between asset classes, but within each asset class. For example, stock and bond market investment styles include:
Stock Market Investment Styles
- Company size ranges (large, mid, small)
- Investment approach (value,core, growth)
- Nationality (domestic vs. international vs. emerging market)
Bond Market Investment Styles
- Maturity (short, intermediate, and long)
- Quality (high, medium, or low quality)
- Nationality (domestic vs. international vs. emerging market)
How Does JIC Determine How Much to Allocate to Each Asset Class?
Changes in an economic style could dictate that different investment styles or asset classes will perform better than others. At JIC, we don’t keep a static allocation. Rather, we maintain flexibility so we can adjust allocations to reflect macroeconomic, fundamental, and technical characteristics.
We use this approach to add value to the portfolio. It takes advantage of value added from both style trends and manager selection. While the total allocation to a broad asset class is usually constant, the allocation within the asset class may fluctuate.
After we develop the portfolio’s allocation, the next step is to implement the policy and construct the portfolio. This is often an ongoing process, as JIC constantly evaluates portfolio investments and potential replacements. Below are a few of the items we consider as we construct your portfolio:
Active vs. Passive Management
Johnson Investment Counsel believes in the use of both actively-managed and passively-managed funds. We often look to use passive funds in broad asset classes, especially where passive funds have a history of outperforming the market. Tax consequences also play a large role in our decision of whether to use actively-managed or passively-managed funds.
The style and historical performance of individual managers is another important component of our analysis. We analyze the impact a new manager may have on the existing portfolio and whether the new asset will provide risk-control or diversification benefits.
Taxes and Multiple Accounts
Tax management is an ongoing process at Johnson Investment Counsel. If you have multiple accounts, we analyze the tax treatment of those accounts and how different allocations could impact your tax situation. For example, we may use high-turnover investments in a tax-deferred account while allocating low-turnover assets into a taxable account.
While asset allocation is the primary factor in determining a portfolio’s outcome, manager selection also plays an important role. Managers can and do either outperform or underperform their style index. By picking experience, skilled managers who consistently win, we can better control risk and capture upside value.
Potential managers are evaluated on both a quantitative and qualitative basis. These factors include:
Quantitative Evaluation Factors
- Consistency of performance versus style-based peer groups and indices
- Consistency of risk characteristics
- Consistency in portfolio characteristics
- Operational evaluation (fees, manager tenure, asset size)
Qualitative Evaluation Factors
Before recommending a manager, Johnston Investment Counsel must have an understanding of how the manager develops potential investment ideas, the research the manager conducts, and the portfolio construction process.
Transparency is a critical component of investment success. You need clear data and reporting so you and your investment committee members can make informed decisions. We need a robust set of data so we can provide thoughtful recommendations.
Here at Johnston Investment Counsel, we value transparency and regular communication. That’s why we offer a clear, concise, and information-packed performance report that includes:
- An overview of capital market returns and summary of key performance drivers
- Total fund, stock and bond allocation versus policy targets and history
- Total fund, equity and bond segment performance
- The portfolio’s risk characteristics
- Specific recommendations
- Individual manager results compared to style-specific indices and peer groups