Questions

Exchange traded funds trade like an individual stock. While mutual funds are priced only once per day (net asset value), ETFs are priced continually by the market which makes them a more efficient investment. ETFs generally mirror a known index or basket of stocks and the holdings are completely transparent, unlike actively managed funds. Since there is no team of portfolio managers and analysts to compensate, ETFs are lower cost than mutual funds and they are tax-efficient since turnover is low, both of which reduce the drain on principle.

We define “active indexing” as using carefully selected exchange traded funds (ETFs) as the primary investment vehicle to populate a dynamic asset allocation framework. MMA determines a long-term strategic allocation that we believe is appropriate for each client’s investment goals, and then actively manages the allocation depending on opportunities available across world markets. Using this strategy, a client gets the benefits of global diversification and exposure to high-growth international markets, while reducing the company- and manager-specific risk of actively managed mutual funds.

The quickly-growing ETF market now reaches far beyond the basic U.S. benchmarks. It is possible to invest in ETFs that track broad market indices like the S&P 500 and the MSCI All Country World Index, as well as very specific segments of the markets. It is even possible to “short” the market using ETFs.

This is a partial list of the areas of the market tracked by ETFs:

• Broad market indices in the U.S. and around the world
• Different capitalization ranges and style indices for both U.S. and international stocks (small, mid cap, value, growth)
• Country specific indices including developed and emerging market countries
• Currencies
• Commodities including gold and other metals, livestock, oil and natural gas
• Listed private equity
• Broad sectors such as Financials, Materials, and Consumer Staples as well as more granular industries like alternative energy and biotechnology
• Global real estate
• Treasuries, investment grade fixed income, high yield fixed income, state-specific Municipal bonds, Treasury Inflation Protected Securities (TIPS)
ETFs that can go short and ultra-short equity indices, countries and sectors

Asset allocation refers to the percentages in which we direct assets to each of the categories of stocks, bonds, real estate, commodities, etc.

Studies have shown that somewhere between 90% and 100% of the volatility of a portfolio’s returns are attributable to the asset allocation decision. This means that deciding which categories of assets and which geographic locations are more important in determining returns than choosing the “right” individual stocks or mutual funds.

We have 3 model portfolios, which we use to benchmark our Conservative, Moderate and Aggressive clients. The percentage allocated to international and emerging market stocks increases as the risk level increases. The total international allocations range from about 20% to 40%.

There are no problems with a client holding assets away from MMA. We advise that when we design your initial allocation we have information about your entire pool of investable assets so that we may evaluate and recommend what we believe to be the best customized risk and return profile.

The transition cost will be unique to every individual client. It will depend on the number of holdings in the investment portfolio, and will be impacted by the client’s individual tax situation. Please consult a tax professional for specific tax advice.

Our custodians and back office providers are TD Ameritrade and Schwab Institutional.

Our research shows that the most efficient way to rebalance a portfolio is not on a regular, calendar-based timetable, but when the allocations deviate from their targets by a certain percentage. This balances the tradeoff between keeping trading costs low and maintaining a fully diversified portfolio.

We see an opportunistic investment as a shorter-term investment where there is the potential for higher than average return. It could be focused on a particular geographical area, or it could be an industry we expect to exhibit strong growth results.

In order to obtain a higher expected return, generally an investor must take a greater degree of risk. If it were possible to obtain the same return with less risk, or maintain the same amount of risk and earn a higher return, an investor would move to that portfolio. Our goal is to work with our clients to find that point where they can be comfortable with the return expectations for a certain degree of risk. We quantify this tradeoff with something called a “Sharpe ratio”, named after Nobel Prize winner William Sharpe. It is a measure of how much return an investor may gain, in excess of the risk-free return of cash, for each additional level of risk.