When we believe active management is useful, we carefully select what investment vehicle to add to your portfolio. We use a tried and true methodology, called The Four P’s. By analyzing and reviewing managers based on these criteria, we try to ensure that we have you on a prudent course for the long term.

People – The first thing we want to consider are the people in the organization we are considering for your money. We want a team of people who demonstrate a commitment to you, have the experience and wisdom to benefit you, and demonstrate stability in terms of tenure at the firm. For example, one of our current holdings has a team of five managers, all of whom have been with the fund since its inception in 2009. All of them have been with the investment company since 2000 at the latest. That is the type of stability we like to see in our people.

Philosophy – Next, we examine their investment beliefs with an eye towards making sure that they have a sound, fundamental set of beliefs that are applied consistently. Specifically, we want to understand why they believe their investments will produce a good return through a market cycle for the amount of risk they being taken. What are they offering that is unique and adds to a portfolio’s sturdiness over time.

Process – Now that we understand their philosophy, do they have a process to implement that strategy on a day to day basis? Do the holdings in the portfolio match the stated philosophy?  What are their buy and sell disciplines? How do they make sure they trade at prices that are best for shareholders? Does the fund have the capacity to increase assets while remaining true to their discipline? If not, will the fund be closed at a certain asset level? These are the types of nitty gritty questions that we are interested in.

Performance – Lastly, the proof is in the pudding. Does the performance demonstrate managerial skill and consistency that provides you as a client an economic benefit for the expenses charged? We do not expect a manager to outperform all the time (if they did, they would undoubtedly be inconsistent in their process and represent a huge risk to you in the future). However, they must offer an outstanding value when compared to their peers. As we are generally investing for an intermediate period of at least one to five years, we are particularly interested in performance over years rather than quarters. As we are extremely focused on avoiding large losses in our portfolio management, we always try to minimize downside capture while attempting to maximize upside capture. So, we want to see how a manager’s philosophy held up during difficult times when compared to an index of similar investments.

By Ted Schwartz, CFP©