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CORE AND TACTICAL INVESTING
Getting to your investing destination, like any journey, isn't always easy. There are many distractions along the way; forks and hazards in the road, variable weather or market conditions, and the most disconcerting, getting lost. Even investment professionals find themselves fighting emotions to stay the course.
Sophisticated individuals and institutions, with millions (even billions) to invest, have understood the effectiveness of creating “core” portfolios that capture the elements of diversification and risk that suit the beneficiary’s purpose and preferences. Core investing is the designated driver for these investors. They can add other assets to try to increase performance (satellite or tactical strategies, see article below), confident that their basic requirements are being addressed and that the final destination is always kept in focus. |
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Core investing addresses these basic requirements by providing a portfolio of assets that:
- guards against short term shocks by diversifying;
- incorporates assets that have demonstrated return and risk characteristics that meet the investor’s goals and tolerance for variable short term results (falling markets);
- have the opportunity to participate in the growth of the economy.
While core portfolios can consist of many different kinds of securities, the introduction of passive or index investing by major pension plans and made more popular by the launch of The Vanguard Group, Inc. in 1974 received a huge boost with the introduction and proliferation of exchange traded funds since 2001. |
Indexing and ETFs are the most effective “core” approaches because:
- operating expenses are low;
- diversification is generally excellent;
- most are highly tax efficient;
- low or no sales loads, although brokerage commissions apply because they trade on stock exchanges (PŮR isn’t a broker so we don’t get these commissions);
- investing styles (value, growth, etc.) don’t matter;
- investors don’t need a fund company or even to hire a portfolio manager (although PŮR thinks we add value by making the process easier, more disciplined, more effective and provide portfolio analytics, performance measurement and accounting on line 24/7).
The most conservative investors could do well if they held only a “core” portfolio. Low cost, good diversification and professional oversight will get the basic job done. No GPS system required.
SATELLITE AND TACTICAL STRATEGIES
All investors want to beat the market. Most investors believe they can.
The fact is that for every winner, there is a corresponding loser. The return of a broad index like the S&P 500 in the U.S. and the S&P/TSX Composite in Canada represents the weighted investment experience of all investors in those securities. Some do better than others for one period but are extremely fortunate to do so over many periods. Sadly, professional investors also have a hard time beating the indices (they generally under perform with consistency over the long term!).
Intelligent investors, institutions and individuals alike, recognize this fact. They use “core” investing (see above) to address their primary return goals. They can then look for returns above their index or benchmark. They are looking for positive alpha (α). Alpha is the difference between an asset’s return and that of a benchmark index with the same or similar risk. If a benchmark is up 7% for the period and the asset is up 9%, the alpha is 2% (9-7=2).
Many alternatives exist in developing “tactical” strategies. Here are just a few:
- overweighting individual holdings;
- certain “hedge” funds;
- specialty or sector funds;
- private equity;
- real estate;
- timing overlays;
PŮR uses a highly disciplined approach to its tactical offering that is designed to capitalize on market inefficiencies over time.
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