In a previously published article we discussed the clear differences between active and passive investment styles. To recap, active investment involves a manager or team of managers making informed decisions about how to invest, while a passive investment simply follows a market index. Now it’s time to take a look at how Cobblestone approaches these styles when advising our clients.
Our general philosophy is that low-cost passive investments should be the core of most investor portfolios. This provides efficient exposure to a diversified mix of major asset classes and allows our clients to grow their portfolios through broad participation in global capital markets.
Active investments are then added to the portfolio to complement the passive core. The purpose is to selectively allocate capital to investments we feel will provide better returns than the market as a whole.
In general we select active investments based on one of three criteria:
1. They capture inefficiencies within markets. Some markets are inherently less efficient. Examples include small-companies, emerging market companies and less liquid fixed income markets. Within efficient markets, there is well-established empirical evidence that companies with certain characteristics tend to outperform the broader index over time. This is sometimes referred to as factor-based investing, which we consider to be a form of active investing.
2. They are in a sector that is not replicable by an index. For example, most private and alternative investments fall in this category.
3. They have talented managers with a repeatable process that deviate significantly from the benchmark. This has, historically, been the only segment of the active management that has provided consistent net of fee alpha for investors.
Our Select Equity based portfolios have significantly higher active management within the equity portion for clients with a desire and willingness to own a more concentrated portfolio of individual stocks. There are two unique benefits to this type of portfolio. First, we do not charge additional fees or higher fees for Select Equity based portfolios, so there is no additional cost for active management relative to passive management. Second, in exchange for accepting periods in which there is the potential for a more meaningful divergence between the portfolio and the benchmark, our clients have the opportunity to own stocks selected by Cobblestone based on the superior quality of the underlying company. The expectation is that, over time, patient investors will be rewarded as the value created by these companies compounds at a higher rate than the broad market.
While every client’s needs are different, we believe a hybrid portfolio construction can allow them to take full advantage of our experience and acumen while capitalizing on the best of both active and passive investment worlds.
Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Cobblestone does not provide tax or accounting advice; clients should also consult with licensed professionals in that field.