Additional Benefits of using Asset Class Funds

There are additional benefits associated with index funds that trustees should consider:

• A much broader diversification; greater asset class purity; greater asset class stability (less size or style “drift”);
• Lower portfolio turnover, resulting in lower fund expenses.
• Much less impact from manager changes.
• Index funds/passive asset class funds tend to get better as they grow larger due to economies of scale, and size has no impact on investment style purity. This is usually not the case with actively-managed funds, which can trend toward mediocrity as they grow larger due to constraints put on managers and/or changes in investment strategy.

Trusted Advisor considers all of these factors when researching the available indexed and passively managed mutual funds. Since style purity and stability, diversification, and the characteristics of the underlying index are so important to future returns, we consider these factors against the operating costs and cost to buy and sell these funds through financial custodians.

Trusted Advisor believes its primary role is to assist trustees and fiduciaries from taking “bad risks.” Our commitment to indexed, asset class strategies is the first step in this process. However, we have found that the discipline to stay with an appropriate asset allocation over the long-term has an even greater effect on returns than the choice between and active and passive investment strategies. In others words, market timing in any form usually has a severe negative impact on performance, and our ability to communicate effectively the risk of market timing to trustees is the true measure of our success as investment advisors.

Therefore, Trusted Advisor is committed to providing frequent, concise, and focused commentary on the principles on which our strategies are based along with supporting research by leading academics and others in the field of finance.

We also monitor trust investments to ensure that allocations remain within target ranges. Periodic rebalancing of the investments maintains the risk and return characteristics of the portfolio as set out in the investment policy and results in a structured “buy low, sell high” discipline that is not based on projections of future market direction. Research has shown that systematic rebalancing improves returns and reduces risk.

Finally, we provide detailed quarterly reports outlining the holdings, activities, income, and performance of trust accounts and we are available at all times during normal business hours to discuss the portfolio, trust objectives, and our investment philosophy.

Professional Trustee Tour: Summary