A substantial part of my job is to try to explain Pinnacle’s investment process to folks who are interested in active and tactical management. Although I spend my days in the trenches with Pinnacle analysts trying to implement our strategy, it is no small challenge to try and simplify our process into an explanation that investors can understand. My latest attempt at explaining what we do around here is to ask investors to visualize several different “buckets of risk.” Let me explain.
In prior posts I’ve discussed Pinnacle’s investment process as a different kind of core holding where our portfolios meet the requirement of attempting to systematically deliver returns within a well defined range of risk or volatility. Traditionally, core holdings are strategic buy and hold portfolios because both advisors and clients can point to historical back-tested performance of asset classes in order to agree on rational parameters for risk and reward. Instead of buying and holding where we are constrained to own asset classes in fixed percentages, we instead are constrained by the historical risk and volatility of the buy and hold portfolio, but with no constraints in terms of what we actually own. Think of it this way…each Pinnacle investment strategy has its own separate “bucket” of risk that is a different sized bucket from the other Pinnacle strategies. We offer clients five different risk buckets to choose from: Dynamic Conservative, Dynamic Conservative Growth, Dynamic Moderate Growth, Dynamic Appreciation, and Dynamic Ultra Appreciation. As you might imagine, as you move from conservative to ultra appreciation each bucket is allowed to own more risk and volatility. This in turn implies higher future returns. How our clients actually choose which bucket is right for them is (hopefully) the result of working with our wealth managers in the financial planning process.
The cool part of this, the part that differentiates us from most other advisors, is that we are free to fill each risk bucket with whatever asset classes we want to own as long as we don’t overfill the bucket. To reiterate, we are not constrained to buy and hold a fixed mix of pre-defined asset classes for each bucket. Instead, our analysts are free to find value opportunities wherever changing market circumstances cause them to appear, and we are free to change them as our experience, judgment, informed intuition, and quantitative assessments may dictate. The risk bucket is defined by historical market returns, but the assets we own at any point in time are only limited by our best evaluation of what constitutes good value. We pledge to honor what we consider to be the two unbreakable rules of investing: 1) We will fill the risk buckets with a diversified portfolio of asset classes, and 2) We will try not to fill the bucket with overvalued assets. At the end of the day Pinnacle clients have different levels of interest in the details of how we fill their risk bucket, but in my experience they all are vested in the idea that we systematically manage risk…and that’s exactly what we do. To offer clients an actively managed core holding is an oxymoron in the investment business. Those that understand this will find great value in our investment process.