Investment Management

The Roscoe Financial Advisory Company knows that despite their stability in the long run, returns among assets can vary greatly during short periods of time.  This situation represents an opportunity for investors.  We use fundamental analysis to estimate relative valuations for the primary asset classes.  Attention to the relationships between inflation, interest rates and earnings yields are closely followed to aid us in determining potential under and over valued situations.

 

Asset Allocation 

Studies show that long-term investment success is far more dependent upon allocating investments properly among the various categories of stocks and bonds than it is on trying to select a single investment.  In fact, evidence suggests that asset allocation accounts for 80% to 90% of the total return of most portfolios.  Therefore, security selection and market timing account for only a small  portion of the variance of total returns.  Why then do so many "investment professionals" spend the majority of their time with what matters the least? 

Asset allocation strategies that are managed in an active fashion can produce enhanced portfolio performance when applied within a disciplined decision making process.  Successful allocation demands the ability to make investment judgments across various asset classes rather than within asset classes.  This distinction is critical and suggests a set of professional investment skills that are not resident in many investment firms.  Similarly, most professionals are not well equipped to manage the asset allocation process in an active sense because the professional's demands are enormous and the required skills usually exceed those required for active stock or bond management.

Fixed Income Management

Investors must first recognize the inverse relationship between interest rates and bond prices--as interest rates rise, bond prices fall and as interest rates fall, bond values rise.  Additionally, one must be particularly cognizant of the fact that volatility or interest rate sensitivity is determined primarily by the maturity structure of the underlying investments.  Our clients, along with the help of the Roscoe Financial Advisory Company, determine the amount of interest rate risk, and therefore price volatility they find acceptable in pursuit of higher return potential.

Fixed income management is founded on several fundamental beliefs about the bond market. First, high-quality portfolios provide the best protection against loss, both ultimately and on an interim basis.  Second, the ability to recognize general economic trends is absolutely necessary to manage bond funds successfully.  Third, return can be increased at low risk by taking advantage of temporary mis-valuations that occur both a) between taxable and tax-advantaged fixed income securities, and b) at differing points on the yield curve.

Equity Management 

Because they are the most volatile asset class included in a balanced portfolio, common stocks represent the highest level of investment risk.  Common stocks also offer the best opportunity for long-term growth. 

Over longer periods, stock-market values are driven by two fundamental factors--interest rates and expected earnings.  The broad market values stocks so that the implicit return on stocks - that is, the expected earnings of companies divided by their stock prices - very closely tracks that of the yield in the bond market.  The expected earnings of the S&P 500 companies divided by their stock prices is known as the "earnings yield."  This is the inverse of the familiar price-earnings multiple.  Historically, while earnings yields nearly always move the same way as interest rates, they haven't always had the same absolute level.

Over time, we gradually adjust the portfolio's relative asset mix in anticipation of changing market and economic conditions.  In line with our conservative clientele, we prefer strategic asset allocation and periodic re-balancing within ranges specified within each client's investment policy statement.

 

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