Wise Stewardship Financial Planning has partnered with XY Investment Solutions to offer professional investment management services to our clients.
XY Investment Solutions is exclusively designed to serve the members of XY Planning Network (“XYPN”) and is focused on delivering investment solutions for the modern advisor and client. They believe in the tenants of asset allocation and diversification, low cost, tax efficiency and discipline. They take a global view and believe in covering both the size and style spectrum with emphasis on value.
XYIS is a subsidiary of XYPN and custodies all assets at TD Ameritrade Institutional, an independent and unaffiliated custodial broker-dealer and member FINRA/SIPC. The Investment Committee boasts over 50 years of combined experience and includes industry luminary and XYPN Co-Founder Michael Kitces, XYPN Co-Founder Alan Moore, XYIS Director Lisa Asher and Mario Nardone, CFA who leads the Investment Committee
Asset allocation. We provide a diverse array of portfolios to cover the spectrum of risk tolerance and required rates of return. We believe that equities (stocks) are the primary means for outpacing inflation over the long run, and fixed income (bonds) provide ballast to moderate portfolio volatility.
Diversification. In today’s global economy, we recognize that there are extremely profitable opportunities based in almost all countries of the world and trade in as many currencies. We believe in diversifying as much as possible in all asset classes and categories with an eye toward risk and cost. Our equity composition will have a neutral position of 50% US/50% Non-US, with a potential range of 2000 basis points. This means the lowest we will go is 30% and the highest is 70% in either direction.
• Within each of those components, small and/ or mid-cap stocks are expected to comprise an above-market weight under most conditions.
• Similarly, “value” stocks are expected to comprise a greater-than-market weight under most conditions.
• Emerging and Frontier Markets will likely always be represented in the portfolio with a combined weight of no more than 20% of equity.
Our Fixed Income component will be comprised predominantly of short- and intermediate term investment-grade securities.
• Non-US bonds shall represent no more than 50% of the portfolio.
• Non-investment-grade bonds shall be considered, but limited to no more than 20% of the bond allocation.
• Inflation-protected bonds will be included in model allocations below 50% equity to replace the real return potential lost with a low equity weighting.
Low Cost. It is widely accepted that a surefire way to ensure you keep more of your portfolio returns is to keep costs low, all else equal. Many of the asset “exposures” we seek are available via diversified, passive investments such as index funds managed by reputable companies at extremely low cost. When possible, it is our preference to use such a vehicle, though we continue to seek the optimal method of exposure, including Exchange-Traded Funds (ETFs) and actively managed portfolios.
Discipline. We have incorporated decades of collective experience and countless hours of research to develop a portfolio that is logical and understandable, and one that investors feel confident sticking to for the long-term. Our portfolio positions will not change with great frequency or without diligent and thoughtful rationale, and certainly will not be a result of knee-jerk reactions or panic in the face of crisis. We believe that our ideal investors will feel the same. After all, it is the mark of a true advisor to allay irrational behavior and emotional responses that, if left unchecked, might otherwise undermine the success of the “best laid plans.” The XYIS Investment Committee expects to make changes to the portfolio no more frequently than quarterly under normal circumstances.
Equity Philosophy and Rationale. We believe in maintaining a globally-diversified portfolio covering as many developed, emerging, and (to a modest degree) frontier markets as cost-effectively as possible. We also believe in covering the size-and-style spectrum to avoid prolonged periods of underperformance due to the cycles that investment styles exhibit. We agree with Eugene Fama and Ken French’s work, which observed that the stocks of smaller companies and those with attractive book-to-market values (aka “value” stocks) tend to outperform the broader market over time.
As such, our stock portfolios will typically exhibit tilts toward securities with these characteristics. Research has shown that the size and style premiums persist in international and emerging markets, which explain our allocations to international developed and emerging markets, typically approximating their respective weights in the global equity universe. Depending upon availability and appropriateness in the mandate, we may also include a position in Frontier Markets. While there are additional risks and costs associated with such an investment, we believe there may be benefits to the portfolio such as further diversification and potential excess return.
For diversification beyond these traditional equity categories, we add a position to Global REITs (Real Estate Investment Trusts), providing commercial real estate exposure in a low-cost package. REITs provide a diversification advantage over traditional equities as they are typically more closely correlated with their respective home economies. Their unique structure also results in return patterns that differ from other stocks and may exhibit similar or better expected returns over the long run.
Bond Philosophy. As mentioned above, bonds are the primary and most widely-accepted means by which to moderate portfolio volatility attributable to stocks. A diversified portfolio of government, corporate, and in some cases municipal bonds should be expected to provide a total return greater than that of inflation, and can provide a haven in times of stock market stress.
While we may typically prefer a fully diversified portfolio to all the categories mentioned above, this is one area where XYIS structures the portfolio according to the environment. Our current preference is for high-quality corporate bonds relative to Treasuries amid ultra-low (and rising) Treasury yields, so we are uncomfortable with a purely passive market weight to Treasuries, which approaches 40%.
While we typically target intermediate-term bonds (generally those scheduled to mature in 7-10 years), we have modestly shifted our portfolio to the short end of the yield curve, reducing our sensitivity to bond yields (a concept known as “duration”). With yields still near historic lows, and with the Federal Reserve’s renewed interest in raising the Fed Funds Rate, we will likely maintain this posture until a more “normal” yield curve presents itself.
We further diversify the bond side with an allocation to international bonds. We prefer using international and global bond funds with tight risk controls and ones which employ currency hedging. While volatility is more acceptable in the higher-risk and higher expected-return stock portfolio, we prefer to mitigate this volatility in bonds to improve the risk/return profile.
Tax-Efficient Equity. The primary objective of a tax-efficient stock portfolio is to achieve as much/many of the benefits of the primary portfolio while giving up as little as possible to taxes. Because our primary portfolios are fairly tax-efficient and already consist largely of passive vehicles, another iteration can be somewhat hair-splitting.
Nonetheless, there are invariably some situations in most advisors’ books where tax efficiency is a paramount objective. We strive to accommodate these situations by holding mostly broadly-diversified funds that can cover an entire category to reduce turnover, and ideally those which take measures internally to further reduce tax costs.
Tax-Efficient Fixed Income. Tax-efficiency is most important on the bond side because that is where the most income is
generated. In general, we follow the same broad philosophy as described above in our Bond Philosophy, but in this case using municipal bond funds. With extremely low yields, cost is very important when choosing municipal bond portfolios, so we seek low cost funds with management teams that can take advantage of their cost advantage. Specifically, we seek out those that keep the fund diversified in very high quality and rigorously-researched issues, in turn keeping quality high and defaults negligible.