OCIO Approach

As an Outsourced Chief Investment Officer (“OCIO”), our team assumes responsibility for both i) security and manager selection and ii) tactical asset allocation decisions. 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.

Investment Philosophy

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:

  • Value stocks outperform growth stocks over the long term
  • Small/midcap stocks outperform large cap stocks over the long term
  • Dividends account for a meaningful portion of long term equity returns
  • Asset class returns revert to the mean
  • Fees and taxes significantly detract from performance
  • Diversification among asset classes, geographic regions, industry sectors, and market capitalization reduces volatility of returns
  • Asset allocation is the most important determinant of an investor’s long term investment returns
  • An investor’s asset allocation should better reflect actual global market capitalization

Broad & Disciplined Asset Class Diversification

Implementation Using ETFs

BEC generally 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 passive indices, the majority of our time is spent on asset allocation decisions as opposed to 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 many different ETF issuers, including iShares, Vanguard, Pimco, SPDR, WisdomTree, Deutsche Bank, Guggenheim, Van Eck, and Invesco, among others. We have invested considerable time evaluating the various ETF options within each asset class. 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.

Global Diversification

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 domestic or international market outperformance tend to last 4-7 years historically. Since 1970 (48 years), foreign stocks have outperformed U.S. stocks in 25 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.

The Case for Global Diversification

Overview of Environmental, Social & Governance (ESG) Investing

ESG is part of the Socially Responsible Investing (SRI) and sustainability movement that focuses on integrating Environmental, Social, and Governance criteria into investment portfolios, with a view toward fostering a more sustainable and well-governed financial system and producing more responsible corporations. While ESG integration is still in its early stages, ESG investing has become increasingly popular with individual and institutional investors, aided by the development of more quantitative, data-driven, and systematic approaches now available from index providers.

A broad array of core themes and issues underlie each of the Environmental, Social and Governance pillars, including carbon emissions and footprint, climate change vulnerability, water stress, raw material sourcing, pollution and waste, labor management, product safety and quality, privacy and data security, access to healthcare, access to finance, Board composition and other corporate governance matters, tax transparency, and corporate behavior.

Socially Responsible/Sustainable Investment Milestones

  • 1960s Concerned investors, religious groups and certain large organizations avoid investments in “sin” stocks and certain geographies associated with social injustice
  • 1980s Initial socially responsible mutual funds created
  • 1990 MSCI KLD 400 Index created, the longest running SRI index
  • 2005 iShares launches first sustainability ETF
  • 2006 United Nations-supported Principals for Responsible Investment (UNPRI) establish six principals for integrating ESG into management of financial assets
  • 2009 Bloomberg increases sustainability news coverage
  • 2015 United Nations Climate Change Conference (COP21) negotiates Paris Agreement to reduce carbon and climate change, which has been signed by nearly 200 countries
  • 2016 Morningstar introduces industry’s first sustainability ratings for funds
  • 2016 MSCI launches ESG Focus indices based on ESG ratings, which have subsequently been launched as investable ESG ETFs

ESG Integration into Passive Portfolios

The main advantages of passive investing (consistency, transparency, and cost-efficiency) are equally relevant to passive investing through an ESG lens. ESG criteria can be integrated into index methodologies by i) using ESG ratings to form a best-in-class selection of index constituents or ii) applying tilts toward constituents with stronger ESG ratings and tilts away from those with weaker ESG ratings, along with other constraints.

These passive approaches to ESG integration aim to achieve neutral to superior risk-adjusted returns than their market-cap base benchmark over the long run without significant tracking error. Continued growth in the number of ESG ETFs is enabling individuals and small institutions to pursue low-cost ESG strategies similar to those utilized by large institutional investors.

Blue Edge Capital ESG Offerings

Blue Edge Capital has developed ESG portfolios for individual and institutional investors who wish to access the associated social and financial benefits of sustainable investing through transparent, liquid, and cost-efficient ETFs. Our ESG portfolios are designed around our core investment philosophies and employ a similar approach to asset allocation and ETF selection as our Global and Traditional portfolios. We worked closely with thought leaders in the ESG space to develop products that will resonate with individual and institutional investors who increasingly seek to align their capital with their mission or values.

Investment Process

Blue Edge Capital has developed a disciplined and repeatable investment process across all portfolios. Our portfolios are well diversified across multiple underlying ETFs. We select funds from various ETF sponsors in order to best capture the exposure we seek for our portfolios, and we do not believe that one provider is best-in-class within every asset class. Among the key criteria we consider in ETF selection are the underlying index, replication methodology, liquidity, market capitalization, premium and discount statistics, tracking error, and tax efficiency. We do not utilize levered or “ultra” ETFs and inverse ETFs and avoid Exchange Traded Notes (ETNs).

When required, we have multiple levers to reduce risk within our portfolios through the asset allocation process, including:

  • Raising cash balances
  • Increasing fixed income exposures
  • Reducing duration and/or credit exposures
  • Reducing exposure to more volatile areas within the equity markets (e.g. small caps, emerging markets)
  • Increasing exposure to liquid alternatives in diversifying/defensive areas

Risk Management

Blue Edge Capital takes a proactive approach to risk management, and we have numerous controls in place to promote the highest standards of professional conduct and to ensure proper safeguarding of information and data.