Caruso McLean Investment Strategy

Maximizing Return for a Prudent Level of Risk

Our risk management strategy centers on the principles of Modern Portfolio Theory (MPT). The goal is to maximize the portfolio’s expected return for a given level of risk. We select each investment based on how its price changes in relation to the price changes of other available assets.

An investor can manage or reduce portfolio risk by holding a combination of investments that are not perfectly positively correlated. This process begins with formulating and plotting the efficient frontier. This is a curve representing all portfolios efficiently allocated to selected assets. The efficient allocations that fall along the curve effectively minimize portfolio risk for a particular expected return.

We utilize Morningstar and Ibbotson capital market assumptions and client asset class constraints to plot the efficient frontier. The plot will display the efficient frontier, any existing portfolio, and a selected target allocation. The efficient target allocation is selected to maximize the return for a prudent selected level of risk.

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Leveraging the Benefits of Index Holdings with Actively Managed Investments

We recommend an approach that incorporates both active and passive management. Specifically, we employ a core satellite approach. This strategy leverages the benefits of passive index investments, low costs, and broad diversification, with actively managed investments. We choose actively managed investments that offer the potential to outperform an appropriate benchmark index over time.

The goal of index holdings is to provide diversity and to track market performance (beta) at a low cost to the investor. With active managers, we look to outperform an appropriate index (alpha) through research and security selection. Caruso McLean’s process for selecting and monitoring active managers is designed to be consistent with the goal of actively managed satellites.

We first seek to identify managers that add value by outperforming an appropriate benchmark index over a full market cycle. We then scrutinize these managers to uncover those that are positioned to add value going forward. We look for qualities such as their reliance on sound investment philosophies, consistent culture and management, and low expenses.

How We Identify Benchmarks

Identifying appropriate benchmarks is essential to performing effective comparative analysis. Caruso McLean subscribes to a database that delivers information on over five hundred indexes, including popular benchmarks compiled by Barclays, S&P, and Russell. We identify appropriate benchmark indexes for use in assessing performance of individual managers, asset classes, investment styles, and the overall portfolio.

We make performance comparisons by examining performance net of fees in relation to an appropriate benchmark index, similar peers, and by examining risk adjusted MPT statistics such as Beta, Sharpe Ratio, and Alpha.

The results are based on a recommended hypothetical model and an actual for the advisory portion of the portfolio (approximately one half) against the assigned benchmark.

If you have questions or would like to find out more about our investment strategy, call us for an appointment today.

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