Building Portfolios for Any Objective
06/21/2012 7:30 am EST
FOLIO constructs Ready-to-Go portfolios to help investors meet a variety of goals. Today, president and CEO Greg Vigrass discusses how the company researched the target-date category and developed its own unique approaches.
Kate Stalter: Today I’m speaking with Greg Vigrass of FOLIO.
Greg, as you know, I spoke with Steve Wallman previously, and I thought we could start out today with you describing some of the investment products that you offer and how these benefit individual investors.
Greg Vigrass: I’d be happy to, and thank you very much for taking the time to speak with me today. FOLIOfn is a company that launched about a dozen years ago, and is really focused on—and quite frankly was the pioneer—in portfolio-style investment management and investing solutions for both individuals and professionals.
Along with that, what FOLIO has done has essentially developed a series of what we call Ready-to-Go folios. Now, a folio is a customizable basket of securities, and a basket of securities can contain individual equities, mutual funds, ETFs, any number of exchange traded vehicles.
It is simply a customizable basket of securities designed around a particular investment strategy, such as a market sector, an investment style, a geographic region or country focus, or even a retirement focus along the lines of our target date folios.
Kate Stalter: Looking at the Web site, at the top performing Ready-to-Go portfolio right now—and anybody who’s been watching the market conditions maybe wouldn’t be terribly surprised, it’s the Bear Market 2X. Tell us a little bit about that one, for example—what that consists of, and how that works.
Greg Vigrass: Sure, it is obviously designed to provide performance in a down market, and takes advantage of several of the inverse and leveraged inverse ETFs that are available in the marketplace today to provide some additional downside exposure.
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As you mentioned, in current times when we are seeing the market volatility the way it is, these have provided a good investment election or alternative to people who are looking to get some downside exposure in to a portfolio to even out the bumps, if you will.
Kate Stalter: I’m seeing the ProShares UltraShort Dow 30 (DXD), the ProShares UltraShort MidCap 400 (MZZ), and ProShares UltraShort QQQ (QID) as some of the top holdings here. Even the companies that run these ETFs will tell you these are designed as trading vehicles, not as long-term buy-and-hold plays, by any means. Talk a little bit about how you view the use of these types of folios for individual investors.
Greg Vigrass: Sure. We view them as a complement to a portfolio, and most folks that are using them are, in fact, using them to get some exposure and some protection in to a portfolio, but not using them as their entire investment strategy.
Very frequently, you will have highly engaged investors that are in fact moving in and out of these particular folios on a fairly frequent basis, based on what their read is on the market. For more of a strategy- or outcome-oriented investor, again, they will likely have some exposure in a portfolio, but they’re unlikely to be the entire portfolio holding.
Kate Stalter: You have a number of other strategies that are available—for example, target date folios and even some that are designed around bonds or other ways of getting income. Let’s talk a little bit about some of those. Maybe we could start with target date.
Greg Vigrass: Sure, the target date folios are something that, quite frankly, we’re very, very proud of. Target dates are an increasingly important segment of the investing market, and certainly a growing segment of it.
A number of years ago, we were looking at—this is going back four to five years—we were looking at the target date space, and in our opinion, in the research that we conducted, our belief was that target date funds had some pretty substantial flaws.
Essentially we found that the funds were not well diversified. We found the risk levels of the funds were not well specified. The risk management procedures were often unclear. The funds often had fairly expensive expense ratios.
We believed it was possible to add significant return with an improved design around the target dates, and particularly focusing on the portfolio construction process. Essentially the things that we were seeing were that the poor diversification meant that the funds were too exposed to major drops in equity indexes, and were certainly exposed to an increase in market volatility.
In essence, what was happening was that the funds were simply not generating as much return as they could for the risk level that was in the portfolios. At that time, we set out to design an alternative to target dates, and then what we call our target date folios.
We looked exclusively initially at the building blocks and we decided that ETFs and the growth we’ve seen in the ETF space meant that we could, in fact, use ETFs as the basic building blocks. They provided all of the coverage that we needed and obviously had very attractive expense ratios.
We decided to try to move away from the idea of a one-size-fits-all approach to target dates and we put in three risk levels for each of the target dates. We have a conservative, a moderate, and an aggressive risk level for each. Target date folios can further be customized to meet the needs of either a plan sponsor, or a 401(k) provider, or an individual who might be investing in a target date for their own purposes.
What we tried to do was essentially create better diversification, and we were seeking higher returns with no increase in risk, or in some cases, even a decrease in the overall risk levels. We’ve used a risk budgeting process to manage risk, rather than simply maintaining a static allocation driving towards a particular date.
What we’ve found is that target date folios, therefore, have been less sensitive to shocks in the market. Since they launched four-and-a-half years ago, and we have now had four-and-a-half years of performance and track record on the target dates, what we’ve found is that they have significantly outperformed the sort of major target date funds in the industry, in some cases by as much as 2% per year, since the launch of the Ready-to-Go folios.
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We’ve found that the focus on the risk budgeting, the focus on automatically adjusting investments over time to maintain the balance of performance and of volatility, that the target dates have essentially proven to be a better, more reliable, and generally higher performing option in the target date space. I think it’s just one more example of how FOLIOfn, through its patented process, has been able to bring true innovation to the market.
Kate Stalter: I want to follow up on something there, Greg. In the market volatility that we’ve seen in recent years, people have become very concerned about capital preservation. But at the same time, a lot of people are still seeking growth. What is the best strategy, and how do you advise people to be balancing those goals?
Greg Vigrass: Yeah, you know it’s a great question, and I think arguably one of the biggest questions people should be asking themselves, and as an industry, we should be focused on.
The last several years in the market have obviously put a premium on what you called capital preservation. The risk, of course, is that too much can be read into that concept, and people can and often do take that to simply mean preserve capital, at the expense of growth.
The one thing I think we all have seen and know is the obvious inflation risks and the obvious upper pressures on cost, price, everything else. And the standard increase in the cost of living means that coupled with longer life expectancy, particularly in the post-retirement years, people really can’t afford to focus simply on capital preservation in its truest sense.
Without having some growth in the portfolio to keep pace with inflation and the increased cost of living, we are in fact, setting people up to realize the ultimate risk of outliving their money. So I think people do need to find a balance between safety and growth, and I think that can be done through prudent investing.
It can be done through true diversification. I think diversification is something that’s also become watered down over the last several years, because ostensibly, many of the asset classes have essentially marched in sync with one another.
So I think it’s important that people look to portfolio construction to bring legitimate true diversification—that we look outside of the typical asset classes, and actually begin to consider other asset classes such as real estate, such as commodities, as both inflation hedges and an opportunity to bring a real balance in to the portfolio.
To truly diversify and find non-correlated asset classes that will, in fact, complement one another to smooth out the lumpiness and the risks in a portfolio, yet still maintain some exposure to growth, again I think this is absolutely necessary. And a lot of people, I think, have gotten away from or gotten too caught up in this notion of simply preserving principal at all costs.
Kate Stalter: Using some of your products, what might be a way to achieve some of that?
Greg Vigrass: Sure, we offer right now about 140 preassembled investment portfolios, as I mentioned at the beginning, that are built around a whole number of concepts. And I’ll just mention them again. It could be a market sector, an investing style, a geographic region, country focus, particular industry focus.
On our Web site at folioinvesting.com, we offer a number of tools to help investors go through some questionnaires, understand what type of investor they are, and then actually move them down the path of creating a portfolio to meet their stated investment needs. By doing that, people can get both a good picture and grasp of what type of investor they are, the type of portfolio allocation that is most likely to meet their needs.
Then further, they can select from amongst these portfolios, the Ready-to-Go folios, they can select and build a portfolio allocation that is designed to meet those specific needs.
The nice thing about the FOLIO platform is it’s automated, it’s one click, it’s cost-effective, so it takes cost out of the equation in terms of trade cost, and it allows people to truly track to their own stated investment goals.
We also allow further customization of the underlying portfolios and we even support automated exclusions, like social sector and individual security exclusions, so somebody in addition to meeting their investment objectives, can also meet their social objectives too. We think the combination is unbeatable.