I have the unusual mandate of being the lead portfolio manager for both our most aggressive (Dynamic Ultra Appreciation) as well as our most conservative (Dynamic Conservative) model portfolios. Some might think that managing the tail ends of the risk spectrum is a recipe for a mental breakdown, as one has to have an almost schizophrenic mindset that changes from an emphasis on maximizing investment returns to minimizing potential losses, depending on which model is being analyzed. Actually, it doesn’t bother me a bit, because our process is tailor made to deal with such a job. Our investment team is constantly evaluating our three primary building blocks (macro fundamentals, market technicals, and valuation) in order to develop a forecast. While our forecast certainly directly influences overall portfolio allocation, it doesn’t mean that we have to buy and sell the same securities or execute trades at the same time in policies that have very different objectives. In fact, our process and philosophy encourage us to treat each model independently when applying our forecast.
As an example, right now we are cyclically bullish due to improving fundamental data and the positive technical condition underlying the financial markets. As a result, we’ve tilted most portfolios towards reflationary assets, which we believe have the most appreciation potential in the current environment. We have the highest percentage of these explosive assets in our most aggressive portfolios, because we think they will make the most money if we are correct that the bull market has more cyclical running room. However, we also clearly recognize that these assets (like emerging markets, late cyclical equity sectors and commodities) are typically very volatile, and simply don’t synch up with our mandate to protect principal for our most conservative clients. Therefore, our Dynamic Conservative model has almost no reflationary assets in the portfolio. Instead, for those clients, our pro-cyclical view is reflected mostly in the fixed income arena in the form of a material percentage of lower quality credit. This is just one example of how we can have one unified view but two very different policy objectives, which require very different portfolio allocations.
At Pinnacle, we manage all of our portfolios using the same philosophy, process and investment views, but we never lose sight that our clients are different people with different goals and risk tolerance. Therefore we embrace having both a unified view of the world, and many ways to express that view through our portfolio construction.
