How We Choose Investment Vehicles

There are many different opinions on the best way to build out an investment portfolio. As you may be aware, we have partnered with Fiducient Advisors to deepen our investment research capabilities since early 2022. We work directly with our team of over 40 analysts at Fiducient to research asset allocation decisions and the best way to structure the portfolio. This is especially valuable as the investment markets and the world generally seem to change at a much faster pace than before.

As we look at the way we incorporate our preferred investment options, let’s start with a little history lesson:

Historically, we have focused on low-cost, passive-like mutual funds and ETFs for the majority of asset classes, with Individual Municipal Bonds as the main exception. Since the Great Financial Crisis (GFC) from 2007-2009, there has been a saying: “Don’t Fight the Fed.” Time and time again, investors have been rewarded by continuing to buy into the market, regardless of the economic environment. This was driven primarily by Fed action of pursuing artificially low interest rates and Quantitative Easing (QE), colloquially known as “turning on the printing press” or “easy money policy”.

During the last 10-15 years, it generally didn’t matter what vehicle was used to invest or what the reasons for investing were, as long as you put your capital at work. Towards the (crazy) end of this easy-money time frame, the best “investments” were not investments at all, but short-term speculations, gambles, and outright fraudulent investments, such as crypto, “meme-stocks” like AMC and GameStop, and NFTs. There were many similarities in 2021 to the late 1990’s, at the height of the “Tech Bubble”.

Then, in 2022, the economic and investment world changed. For the first time in 40 years, INFLATION became the buzzword that everyone was worried about. With the rise in prices around the world, public concerns shifted quickly to fear of a return to the 1970s Stagflation. Central banks, led by the US Federal Reserve (FED), began a complete policy reversal. QE stopped and interest rates quickly rose. As of May 2023, interest rates around the world have not yet peaked. This change in Monetary Policy creates a new investment environment that we have not seen in at least 15 years and, in some ways, many decades longer.

As long-term investors, we must avoid reacting too quickly to short-term changes, but we also must be prudent when there is new data and information. There is a saying in many different fields that “we fight the last war”, implying that as humans our nature is to learn from the last major challenge and applying the lessons we’ve learned to the next challenge, whether or not these lessons are relevant now. If we are complacent with new information, we are all prone to come to incorrect conclusions on the best way to move forward.

This leads to today. We must focus on the best way to move forward with our investments, given the current information available to us. In this case, as we are now in a new investing regime. What was prudent in the past is not necessarily appropriate moving forward.

One key piece is understanding that “the market” is not one big homogenous behemoth, but instead is made up of individual companies and investment opportunities, in different sectors, around the world.  As we look to invest, we must understand that different areas have different factors that change investment expectations. Likewise, the process of choosing the best way to invest in each area of the market needs to be specific to the market we are investing in.

One method to view the way to invest in the market is highlighted in the chart below. On the horizontal X-axis, we are comparing how difficult it is to broadly invest and receive a “market” return. On the vertical Y-axis, we demonstrate the potential for divergent performance, implying an “edge” to expert, niche managers with better information.

As I mentioned at the beginning, one of the only areas that we have always focused on a more active approach is in Bonds, particularly focusing on Municipal bonds. We have identified a process and managers who we believe can execute a specific approach to provide consistent returns in an area that is harder to “track the market” and where there is the potential for outperformance.

It is our belief that with the change in monetary policy and economic environment, it is prudent to shift away from pure passive investments that worked the last 15 years. We believe that there is both the potential for higher returns and lower downside, while also recognizing that it is more difficult to track the market going forward.

I believe that our clients choose to work with us partially because they recognize that we are not “asleep at the wheel”. We have a fundamental belief that we have a responsibility to be good stewards of our clients’ wealth, which means we must stay curious and forward looking. At times, this means we must change our recommendations dramatically, as we look to best position our clients moving forward.