In our capacity, as an Outsourced Chief Investment Officer (“OCIO”), our team assumes responsibility for both i) security and manager selection and ii) tactical asset allocation decisions and all client assets are managed on a fully discretionary basis. Tactical shifts to any portfolio are based on analyzing macroeconomic factors such as GDP growth, inflation trends, employment statistics, financial market conditions, and other non-economic factors, including geopolitical developments and changes in tax and regulatory policy. We also consider fundamental and quantitative measures such as absolute and relative valuation, relative performance between asset classes, growth rates, and debt levels. Our asset allocation decisions are governed by strict policy ranges between asset classes, although our Investment Committee implements a tactical asset allocation strategy within these ranges to manage risk and to capitalize on market opportunities.
BEC’s investment style and philosophy are similar to the “endowment model” strategies utilized by many of the largest and most sophisticated institutional investors, but our approach substantially reduces total investment costs and improves liquidity and transparency. The key underlying tenet to the endowment model approach is that each asset class has a measurable historical return, volatility, and correlation, and thus, by adding multiple asset classes, the investor improves portfolio diversification, reduces overall correlation of portfolio returns, and lowers total portfolio risk levels relative to a given investment return. In plain English, it is our goal to achieve targeted investment return levels with lower volatility through a market cycle (generally 5-7 years). Our portfolios are designed around several core philosophies, including the following:
BEC utilizes exchange traded funds (ETFs) rather than active managers or traditional mutual funds to achieve our asset allocation, which helps to reduce investment costs, improve transparency, and eliminate the manager selection risks associated with active management. Since these ETFs track underlying passive indices to implement our asset allocation, the majority of our time is spent on asset allocation decisions and not on individual manager evaluation.
BEC is agnostic when it comes to ETF fund sponsors. No ETF family is “best in breed” within every asset class, so our portfolios have included funds from several different sponsors, including iShares, Vanguard, Pimco, SPDR, WisdomTree, Deutsche Bank, Guggenheim, Van Eck, and PowerShares, among others. We have invested considerable time in evaluating the various ETF options within each asset class, and the criteria used in making these selections include the specific underlying passive index, the index replication methodology, liquidity and market capitalization of the ETF, relative cost, tracking error vs. the underlying index, tax efficiency, and premium/discount statistics.
While the global economy is increasingly interconnected, the U.S. and international markets behave differently. Adding meaningful foreign stock exposure can both enhance long-term returns and reduce portfolio volatility. We believe that most investors are underweight in their exposure to international markets and that asset allocation should reflect actual global market capitalizations. Periods of outperformance tend to last 4-7 years historically. Since 1970 (47 years), foreign stocks have outperformed U.S. stocks in 24 of those years and U.S. stocks outperformed foreign stocks in 23 of the years. Exposure to both markets provides balance in our portfolios, benefitting our clients over the long-term.
Client Communication: BEC believes that direct and frequent communication with each of our clients is critical, and we take a “team based” approach to serving each of our clients. BEC team members are available to provide in-person updates to the our clients as needed, and we are always happy to discuss current developments in the financial markets. We service all of our clients from our office in Richmond.
Performance Reporting: BEC clients have access to a comprehensive on-line portal, which provides daily updates on portfolio holdings, asset allocation, investment performance, recent transactions, fees, and contributions/withdrawals. In addition, we provide monthly snapshot performance reports, a comprehensive quarterly letter, and client statements, samples of which are included herein. We are happy to provide an in-person demonstration of BEC’s portal upon request.
Custody of Client Assets: BEC works with most major custodians. We generally recommend that clients custody their assets with a low-cost custodian like Charles Schwab, which helps to reduce the all-in investment cost to our clients. BEC is not affiliated with any custodian nor do we receive any compensation from them, hard or soft. One of the administrative benefits of our investment approach is the simplicity of tax reporting. Our clients receive a single Form 1099 towards the end of February, which greatly streamlines the portfolio accounting process compared to solutions that involve detailed partnership accounting.