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Background
Financial markets are dynamic, yet most traditional investment management approaches are passive. Why? During the late 1990’s, passive asset allocation investment strategies gained popularity, due in large part to a record bull market. With the end of the 1990’s came the crushing bear markets of 2000, 2001 & 2002. With no adequate downside protection, many people lost significant wealth, forcing recent retirees back to work. At BAAM we believe in a strategy that attempts to protect assets in down markets. Simply put, we believe that there are times to own equities and there are times not to own equities and to remain in cash.
Passive or Active investing? It is easy to get caught up in the Wall Street hype about which investment approach is better. Proponents of both Active and Passive management styles firmly believe that their approach is the best option to provide an investor the greatest return over the long term. In many ways the are like rival political parties. They both see the investment world in different ways, both making logical and passionate arguments for their viewpoint.
We believe that utilizing passive investment techniques alone, asset allocation along with a buy and hold investment philosophy provides investors with little downside protection in down stock markets. Instead, our investment process controls downside risk by utilizing a two tiered strategy that takes advantage of the benefits of both Active & Passive investing.
Active Investing
Our All Cap Core Strategy provides us a strong technical opinion on the stock market by measuring market sentiment. When market sentiment is positive we construct a portfolio of technically and fundamentally strong stocks. When market sentiment is negative we protect capital and move 100% into cash. Implementing a philosophy like this is not easy. It requires discipline, focus and a technically driven strategy that is not subject to emotional decision-making.
Passive Investing
At BAAM our passive/indexing approach is accomplished by building diversified portfolios of Exchange Traded Funds (ETF'S) . Historically the benefits of indexing include low cost , tax efficiency and broad diversification. ETF's extend the traditional benefits by also providing investors with increased trading flexibility and the ability to add focused exposure to specific markets. The goal of our ETF portfolio is twofold. The first objective is to provide additional diversification through investment in assets that diversify the All Cap Core strategy. Additionally we are looking for investments that represent a longer term secular growth opportunity. Typically these assets will have a two to five year time horizon and potentially benefit from some macro trend occurring in either the domestic or international markets.
Summary
The All Cap Core (Active) and the ETF (Passive) strategies are designed to work together to bring investors the benefit of both active and passive management styles. When market sentiment turns negative the All Cap Core will move to cash in an effort to protect principal. The ETF portfolio will remain invested throughout various market cycles to provide the benefits of long term equity appreciation. We believe that both styles combine to provide additional benefits beyond a traditional asset allocation approach.
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