Many investment firms talk about asset allocation (i.e., dividing a portfolio among different asset classes such as stocks and bonds) but they use a ‘static’ model; in other words, they promise to maintain a given weighting for bonds, US stocks, foreign equities and other securities in your portfolio. When market prices shift, those firms simply sell some of the securities that have increased in price relative to their other holdings and buy more of the security whose relative price has decreased. We believe that other firms make such adjustments far too often, thereby cutting short their ability to take advantage of moves in the market…and incurring extra costs in the process.

Proper asset allocation requires assessment of an individual’s risk tolerance and investment objectives, as some securities offer the possibility of higher returns but are inherently more risky. However, Holos’s approach to asset allocation goes much further, and the methodology we use is the key to our strategy. It is based on an examination of the relationship between an asset class’s market price and fair value. The analysis considers inflation, interest rates, productivity growth, and earnings and dividend yields. Using these factors, the methodology attempts to identify asset classes that are attractively valued relative to their market prices. A unique formula is applied depending on an asset class’s type (e.g., stock or bond), size (e.g., large- or small-cap), and geographical region.

Therefore, while Holos offers portfolios with different weightings of stocks and bonds based on an investor’s profile and preferences, each portfolio’s holdings will vary over time in accordance with changing market conditions. For example, in 2008 the methodology told us that equities were modestly overvalued and our asset allocation was approximately 59% equities / 41% debt. In 2009 the methodology indicated that equities were substantially undervalued. As a result, we shifted our allocations to approximately 91% equity / 9% debt. Our disciplined year-long adherence to a valuation based asset allocation led to our strong performance in 2009.

We believe that making less frequent adjustments than our competitors and using dynamic as opposed to static allocations may improve long-term performance and mitigate risk.