Money
Management
No
Style is Our Style
We are not like many advisory firms that have portfolios to fit
every occasion. We don’t have an “income” or “value”
or “growth” portfolio. Our portfolios are tailored to
the needs of the individual investor but all are based on the Cornerstone
Model Portfolio.
Many
money managers have decided to be “value” or “small
cap” or some other specific style. We haven’t. Since
markets shift from value to growth and bull to bear, we believe
it is in the client’s best interest to be fully flexible.
We don’t try to force a style on the market; rather, we let
the market tell us what is working and go with that.
We
may use more than one strategy at the same time in a portfolio.
We may have a long-term position in an investment to take advantage
of a long-term cycle, but at the same time have a contrary position
to take advantage of a short-term countertrend.
A
Better View From Up Here
A prevailing theme in many advisory firms is the “bottom-up”
approach. This is where they study companies and put together a
“portfolio of good companies.” They believe this can
override the forces that drive markets up and down. Research shows
this isn’t true.
Most
research shows that the direction of a stock is primarily dependant
on the direction of the market, secondarily it is dependant on the
direction of its industry and lastly on its own fundamentals.
Knowing
this, we take a top-down approach. We look to the long-term cycles
of the market and economy. We determine where in the cycle we are,
based on history and current statistical trends. We determine an
economic overview and market valuation. We then determine which
sectors will likely perform best given the overview. We then look
to the industry and last we pick stocks within the industries best
poised to do well.
Cycle
Dictates Asset Allocation
To many money managers, asset allocation means mirroring the market.
Not to Cornerstone. We base our asset allocation on what is dictated
by the current part of the cycle. It makes little sense to us to
own bonds when interest rates are rising. We don’t see the
logic of investing in stocks that are above their historical norms
for overvaluation.
Research
Drives Money Management
Our research is in charge of the Model Portfolio. We don’t
just analyze the current environment, but have gained an understanding
of what characterized previous cycles and what to expect from current
and future cycles. This analysis keeps us from jumping on “false
signals” that could end up just being counter trends within
a major trend.
For
instance, previous bull markets in stocks have started when the
market traded at P/E ratios in the single digits. They started after
debt levels peaked and started to come down, in real terms. Bull
markets usually start after a recovery of pricing power has returned
to businesses.
None
of these conditions were present when the market started to rally
recently. Being able to tell the difference between a new bull market
and a rally within a bear market can mean the difference between
success or failure.
A
Man’s Gotta Know His Limitations…
We know what we do best – put together low risk portfolios
and trade short term. We know our research. What we don’t
do is try to figure out if Bolivian bonds are a better buy than
Czech debt. We don’t research Italian utilities compared to
Australian. We let specialists do that.
For
most specialty situations, (Foreign bonds, international equities…)
we use certain mutual funds that have shown their research meshes
with or compliments ours. In this way we are able to get top quality
management in areas where we know we need to be, but don’t
have the hands-on expertise. We can’t do everything!
To
Fee or Not to Fee
Since many of our client’s portfolios will have a portion
of assets in mutual funds, we have created a Hybrid Account for
billing purposes.
Traditionally,
money managers charge an annual fee of a certain percentage of the
client’s assets. (Money manager's all have their own, different
fee structure and rates.) This fee is usually calculated monthly
and usually deducted from the account quarterly. On a $350,000
portfolio, the fee could be 1.75% annually. This means about
$1500 will be deducted from the account each quarter.
Many
of the funds we use have various classes of shares. The main difference
in these share classes is the internal fee. Traditional money management
usually uses the Institutional or no-load version of the fund.
(No-load funds normally don't pay a broker or representative a commission
or an ongoing trail fee. Retail funds do pay commissions and
ongoing trail fees. The fund prospectus details all of the
particulars of each fund and their share classes and how brokers
are compensated.)
We
realized that the difference in the internal fees between the Institutional
or no-load funds and the retail version of the same fund was sometimes
lower than our management fee. So we created the Hybrid Account
that takes advantage of this difference for the client.
Suppose
XYZ mutual fund has a no-load version with a .75 internal fee.
And they have a retail fund that has a 1.60% internal fee. The retail
fund’s internal fee is .85% higher than the no-load. Let’s
say the portfolio is $350,000. Our fee would be 1.75%. We will use
the retail fund with the higher fee and NOT CHARGE
our management fee. This saves the investor almost 1.00% (0.90%)
on that investment in fees, (this may or may not translate into
a performance difference.)
| |
Traditional |
Hybrid |
| Internal
Fee |
0.75 |
1.60 |
| Cornerstone's
Management Fee |
1.75 |
0.00 |
| Total
Fees |
2.50 |
1.60 |
Even
though internal fees are not out of pocket expenses for the investor,
we still consider them when calculating the client’s expenses.
A client with a $350,000 portfolio might have as much as 50% in
mutual funds that we don’t charge our managmenet fee on. This
reduces their management fee from $1500/qtr (Traditional method)
to around $750/qtr.
We
are constantly reviewing the internal fees of the funds we deal
with and updating our systems to have the most accurate estimates
of expenses.
Everything
an investor needs and more…
With Cornerstone’s method of managing money, investors are
exposed to areas they may not be familiar enough with to invest
on their own and usually can’t find with most traditional
money managers. Our approach is pro-active instead of reactive and
we are constantly looking for what is next.
Our
fee structure favors the investor to the point that many want to
know what they are missing! Clients get the attention of a small
boutique money management firm and the client services of a nationally
recognized, industry leader – National Financial Services.
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