Investment Management
Wealth engineering
Adaptive Wealth Engineering engages in a process formally known as Wealth Engineering. Wealth Engineering combines a sophisticated, modular approach to financial planning with an evidence-based approach to investment management.
Emphasize Securities with higher expected returns
- Security omissions
- Exclude small growth, low profitability stocks
- Exclude small high asset growth stocks
- REITs
- Highly regulated utilities
- Security weighting
- Overweight smaller market capitalization
- Overweight lower relative price
- Overweight higher profitability
- Overweight lesser goodwill
- Overweight lesser accruals
- Balance value and profitability factors, conjointly
- Security selection
- Exclude small growth, low profitability stocks
- Exclude small high asset growth stocks
Incorporate additional information about expected returns into buy and sell decisions
- Cash acquisition
- Sell equities that have become the target of an acquisition. After the target company offer, the stock price will trade as cash-like until the acquisition is completed
- Momentum
- Consider momentum expected return implications for both buy and sell orders
- Securities lending costs
- Delay purchase of small cap securities with a high borrowing fee in securities lending market
- Control trading costs
- Economies of scale and efficient market access help control explicit costs
- Flexible trading helps control implicit costs
Maintain consistent focus on premiums (Mutual Funds & ETFs)
- Daily rebalancing
- Evaluate current holdings and cash balances daily
- Ensure meaningful turnover
- Rebalancing candidates meaningfully improves expected returns after anticipated costs
Increase the value of holdings in the fund
- Corporate actions
- Maximize the value of corporate action elections
- Investment stewardship
- Advocate for investors to enhance shareholder value
- Securities lending
- Lend securities to generate securities lending revenue pass through to investors
Portfolio level rebalance
- Periodic rebalance (5%/25% rule)
Minimize taxes
- Tax loss harvest when applicable
- Control taxable distributions
- Apply smart asset placement
- Apply high cost accounting methodology
Factor Investing, Dimensions of Return, and Average Historical Outperformance
- Academic research on capital markets has identified dimensions of return that may help improve expected returns over time. In the world of finance, this is commonly known as factor investing. While hundreds of factors have been identified, research and real-world implementation tend to emphasize a smaller group of factors that have shown greater persistence, reliability, and investability.
- The primary factors we consider inside portfolios are Beta, Size, Value, Profitability, Investment, and Momentum. It is worth noting that, because of the high turnover and potential tax consequences associated with momentum investing, we generally use momentum as a function of trading rather than as a primary driver of long-term portfolio structure.
- Beta is a measure of volatility, or systematic risk, of a security or portfolio in relation to the overall market. A beta of 1 indicates that a portfolio or security has market-like risk. A beta greater than 1 indicates that the security or portfolio carries more risk than the overall market and may carry higher expected returns as compensation for that additional risk.
- Size refers to the historical outperformance of small-company stocks compared to large-company stocks. Because smaller companies may carry greater business risk, especially during economic downturns, investors may expect to be compensated for taking on that additional risk. Historically, this premium has often ranged from approximately 1%–3% per year.
- Value is a well-documented return premium. Academic research suggests that the price an investor pays for a stock matters, and historical data indicates that value stocks have outperformed growth stocks over time. Depending on the period studied, the historical value premium has often ranged from approximately 2%–4% per year.
- Profitability is another important factor we consider. Academic research suggests that companies with higher profitability have historically tended to outperform companies with lower profitability. When examining historical data, the profitability premium has often ranged from approximately 3%–4% per year.
- Momentum refers to the tendency for securities with strong recent performance to continue performing well over shorter periods of time. However, because momentum can conflict with the value premium and may involve higher turnover and trading costs, we generally do not use momentum as a core component of portfolio structure. Instead, momentum may be better applied through day-to-day trading decisions within ETFs or separately managed accounts. When implemented efficiently, momentum-based trading can potentially add approximately 0.10%–0.15% per year.