Model Portfolios

Portfolio Purpose

At NI we uniquely provide our clients investment advice from the financial planning viewpoint.

That is, when we design a client investment portfolio, it addresses the critical question:

"What is the purpose of the portfolio?"

Generally, portfolios can be categorized by purpose as follows:

1. To fund long term goals
•   e.g. retirement, education
•   Utilize managed funds (unit trusts) primarily
2. To enhance returns on liquidity (cash)
•   Bonds or quasi bonds (preferably tax-exempt)
3. To enhance returns on speculative assets
•   Stock picks, direct investments, hedge funds

"NI Model Portfolios are designed to address the first purpose: "To fund long term goals".

NI Model portfolios are sub-divided by portfolio risk and size. There are 5 portfolio risk categories.

NI Model Portfolios by risk

Each portfolio risk category would have a different mix of fixed income and equities. A conservative portfolio would have far less equities than an aggressive one. An example of our strategic asset allocation would be:

Asset Type	Conservative	Moderate Conservative	Moderate	Moderate Aggressive	Aggressive
Equities	25%	40%	55%	70%	85%
Bonds	72%	57%	42%	27%	12%
Cash	3%	3%	3%	3%	3%

NI Model Portfolios by size

Each portfolio risk category size is then sub-divided into 3 sizes generally. An example of portfolio size categories:

	Small:	<$50K	- < 5 funds (G)
	Medium:	$50K to $100K	- 5 to 10 funds (G,R)
	Standard:	>$100K	- >10 funds (G,R,S)

An example of how equities are allocated strategically:

Portfolio Size	Global	Regional	Sector
Standard	40%	40%	20%
Medium	50%	50%	-
Small	100%	-	-

There are essentially 3 ways for an equities portfolio to be diversified:

For standard size portfolios, we are able to diversify across all 3 ways. However, if the portfolio is too small, this might not make economic sense. However, we offset the lack of diversification with a more defensive portfolio. Thus, moderating risk without sacrificing returns too much.

Strategic Asset Allocation

The strategic asset allocation (SAA) of a client's portfolio is the long-term (over-business-cycles) asset allocation he or she ought to have for a given investment risk appetite. Periodic rebalancing here would not only ensure that it is consistent with the clients' needs, but ensures that significant out performance in a particular asset class is locked-in as realized profits.

Tactical Asset Allocation

The tactical asset allocation (TAA) is the on-going variation which NI recommends to the client as the investment and business climate changes, periodically as well as a-periodically. During different phases of the global business cycle, different types of assets (bonds, equities, cash etc.) would tend to outperform relative to each other. TAA is therefore intended to squeeze more performance out of a portfolio, over and above the gains derived from periodic SAA rebalancing.

Fund Selection

Our fund selection process is driven by:

1. Performance consistency over varying time periods.
2. Performance relative to benchmarks and peers.

It would be ideal to have a fund which is consistently number 1. This, of course, is rarely possible. As Asset Allocation is a bigger contributor to portfolio performance, we therefore place more emphasis on performance consistency rather than outstanding but with a history of high volatility. This unpredictability would be disruptive and detrimental to the asset allocation process.

Fulcrum

Within the framework of systematic portfolio management, we offer clients a choice.  Clients can have

1.       portfolios benchmarked against specific performance indices e.g. a global stock index, which is the traditional approach, or

2.       portfolios managed on an absolute return basis, such as “Fulcrum”

3.       or a combination of both

What is Fulcrum?

 Fulcrum is a portfolio advisory and management service with the goal of achieving absolute returns regardless of market direction, at low total portfolio management costs.  Driven by global macroeconomic considerations and strategies, Fulcrum portfolios will have the flexibility of investing long and short in equities, fixed income, commodities and currencies globally. 

This will be done by utilizing primarily exchange traded funds (ETFs) traded on 22 exchanges around the world, but through one consolidated internet-based account.  The more than 1000 ETFs available will be the primary instrument of choice.  ETFs permit us to go long and short efficiently whilst automatically achieving diversification and avoiding single-stock risks. Yet, whilst permitting the investor to avoid single-stock risks, it allows the investor to pursue targeted sectors as opportune e.g. US Home Builders. 

Absolute returns regardless of market direction will be achieved by combining and diversifying among long and short (also called inverse) ETFs. 

Why Fulcrum?

In the longer-term,  Fulcrum combines two important key investing trends which investors cannot ignore:

1.       ETFs (diversification at the lowest possible costs) and

2.       Alternative investing strategies (flexibility to profit in up and down markets). 

Within the universe of alternative investing strategies, Fulcrum will focus on historically the most successful of these strategies – global macro strategies.  Herein, New Independent is uniquely positioned to help clients.  Global asset allocation has been the focus of our investment advice to our clients in the past seven years since the founding of the firm. 

Fulcrum allows the investor the flexibility to invest like a hedge fund but at low cost and with real-time transparency.  Fulcrum allows the individual investor the investment scope of large institutions without the need to have very large portfolios and outlays.

Portfolio theory and the practice show that investors can eliminate specific risk of individual securities by diversifying broadly, thus only having exposure to market risk – the ups and downs of the market in general.  Market risk, which is the bane of investors seeking absolute returns, cannot be diversified away.  Fulcrum allows the investor to minimize and even profit from market risk because of the flexibility to go short.

An Illustration

At any one time, Fulcrum will be constructed around a variety of strategies.  These strategies will be derived from the investment climate and outlook (anticipated changes) around the world.  The following is an example of one such strategy.

At the beginning of 2008, the outlook was a poor one for the US but a benign one for the rest of the world.  Reflecting this, the US dollar was weakening but US exports were growing because the rest of the world was still prosperous.  Overall equity valuations in the rest of the world were not expensive.

One would therefore expect equities ex-USA to outperform US equities but US government bonds to do well.  A typical strategy congruent with this outlook would be to invest in a global equity ETF but short (or eliminate) the US exposure by investing in an inverse US equity ETF.  Exposure to US government bonds would be through a US Treasury ETF with a maturity of around 5 years which would be relatively stable.  Therefore the strategy would have been translated into 3 ETFs:

iShares S&P Global 100 Index (IOO) – 45% of portfolio

Short S&P500 ProShares (SH) – 25% of portfolio

iShares Barclays 3-7 Year Treasury Bond (IEI) – 30% of portfolio

Such a construction would position the portfolio for equity upside but provide protection on the downside.  The accompanying charts show how things worked out over a 12-month period.    Despite the most horrendous year for global equities since the 1930s, the simple 3-ETF portfolio would have lost only 1.8% at the end of 2008.