Our investment development
process begins with a complete evaluation of the client's financial situation.
This includes the client's goals and objectives for the portfolio assets, tolerance
for risk, time horizon, age, tax considerations for the portfolio, and any unique
circumstances. We will also look at specific major financial goals that must
be incorporated into the investment plan, such as retirement, children's education,
a major purchase, a required distribution, or inheritance.
We make a special effort
to work with the client to explain the different investment classes and the
rationale behind our portfolio development process. It is critical to the portfolio's
ultimate success that the client understand and embrace the investment strategy
we have developed.
Because the majority of
our clients have unique and complex financial situations, we develop custom
portfolios reflective of each client's needs and goals by establishing and managing
their asset allocation. Asset allocation is the investment strategy utilized
by nearly every large pension and endowment fund in the United States. Effective
and appropriate asset allocation is a major factor in reducing portfolio volatility
and involves directing portfolio assets to a variety of different investment
types, or "asset classes."
We build and balance our
client's portfolio among all asset classes including: stocks, bonds, cash or
cash equivalents, and real estate. For more rigorous allocation models we break
down asset classes in numerous ways. For example, stocks can be divided into
domestic and international. These can then be divided into large, medium and
small-sized companies. Finally, you can categorize stocks by the investment
management style that they fall under, either growth or value. Fixed-income
investments can also be divided into domestic and international, then into government
and corporate, taxable and tax-exempt, and further by duration: short, intermediate,
In general, asset classes
have different levels of risk and return. Over time, these different levels
of risk and return tend to behave independently of each other. Frequently, this
independent behavior causes the risk of different asset classes to partially
offset each other, and provide a decrease in the volatility of the overall portfolio.
This asset allocation is
determined by the particular characteristics of the client, including risk tolerance,
age, income, and other assets. Within each of the selected asset classes, we
then select above average mutual funds for our clients investment.
Falconer primarily uses
mutual funds when selecting investments to meet a particular asset class need.
We manage portfolios on the "macro" level, setting the strategic asset
allocation targets and making tactical portfolio allocation decisions. We add
value by managing and controlling the portfolio volatility. In addition, we
facilitate portfolio distributions and minimize portfolio taxes when these skills
are required. Falconer will utilize individual stocks and bonds in client portfolios
when the situation warrants.
We believe that mutual funds
offer attractive characteristics with the management of the portfolio on the
"micro" level, namely, professional money management and research
of individual securities at a reasonable cost. Furthermore, it is virtually
impossible to obtain the diversification available through a portfolio of funds
with an individual stock portfolio.
We perform extensive analysis
of mutual funds and select funds that most appropriately meet the objectives
of a particular portion of the investment portfolio. We are particularly concerned
about the ethics of the fund companies and fund managers that we select. It
is imperative that the funds we select act as stewards for the shareholders
that invest in their funds, and indeed, place the interests of shareholders
above their own. After that, we compare and judge the remaining mutual funds
against their peers. We use criteria such as performance relative to peers,
cost, tax efficiency (when relevant), money manager experience, fund family,
and correlation to other funds in the portfolio.
We continually monitor the
funds that we recommend, others that we are considering, and the mutual fund
industry in general for changes that would affect current clients. We will make
changes when we believe it to be in the best interests of our clients. However,
consistent with what is stated above, poor performance alone is not sufficient
grounds for selling a fund. We expect that all funds will experience poor performance
from time to time as the investments that it focuses on go in and out of favor.
It is impossible to predict with any consistency and accuracy these cycles,
and therefore, we will do very little to try to "time" the market.
We always take special note
of costs. We exclusively recommend no-load mutual funds. In addition, we make
costs an important consideration when selecting mutual funds for a portfolio.
Funds with a higher than average expense ratio must clear a much higher barrier
to be selected for inclusion into a client portfolio. This is because while
past performance is no predictor of future performance, one can predict with
high certainty the cost structure of a particular mutual fund (decreases in
fund costs are, unfortunately, a rare event). Costs are of particular importance
with fixed-income funds, due to their typically lower rates of return (a given
expense ratio will consume a greater percentage of the return when the return
For more information on
our investment philosophy, policy, or procedures please contact us directly.
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