Investment Philosophy: Active, Passive, or Both?
To use illustration by exaggeration: Why does the passive ETF index tracker, VOO, the Vanguard S&P 500, have an expense ratio of .05% (Five one hundredths of one percent) yet at the other extreme, the average Hedge Fund has an expense ratio of 2.00% plus a “performance fee” of 20% of annual gains? Presumably, the reason in most instances is that the Hedge Fund’s actively managed “special sauce” is expected to deliver better performance than Vanguard’s passively managed ETF.
Often, however, this expensive “special sauce” ends up delivering an actively managed return, net of fees and higher taxes, which is lower than the passive index, VOO over time. This “active versus passive” discussion will rage on for decades. At Story Capital, the primary objective of our clients in the accumulation phase of life is to tax effectively match market performance over time horizons exceeding 25 years. In contrast, most clients in the glide path to retirement or Phase II of their lives have a different objective; frequently, these clients do not want (or need) market returns because they don’t want market risks or loss potential.
Story Capital uses a low-cost, tax-efficient, index-tracking, investment management strategy in our Coreclient portfolios. On larger portfolios, with the blessing of our client, we may deploy multiple actively managed, non-correlated Satellite strategies for about 20% of cumulative assets. Why we do this is an interesting topic for a future article. This philosophy is generically called: A Core/Satellite investment management philosophy.
What is Story Capital’s “Special Sauce?”
- We use new technology to passively manage, low turnover, individual securities to track nationally recognized indexes. Only rarely are ETF’s and Mutual Funds used.
- Our use of individual securities allows us to use technology to provide continuous tax management, to deliver a cost-effective, highly tax-efficient, investment experience.
- While we never promise to “beat the market,” we continually strive to deliver valuable human insight on all market related issues.
- The latest technological development has empowered Story Capital to align our clients’ personal values with the actual business objectives of the companies whose stocks are held in their portfolio. We call this: Impact Investing. For Example: Do you want nuclear power generation in your portfolio? Some clients do and others do not. We give you the power to choose; the power to include or exclude companies based on their societal impact. Impact investing is a great starting point for parents and their adult children to find common ground to engage in meaningful family conversation around both values and investing!
Because our clients own individual securities instead of mutual funds or ETF’s, they can take advantage of opportunities for cost-effectiveness, personalization, and optimal tax management.
1. Index Tracking, Passive Portfolios:
In taxable accounts, we generally suggest using short maturity, Minnesota Municipal (Revenue) Bonds on the fixed income side and low-turnover, individual securities to passively track the performance of nationally recognized US and foreign equity indexes. This cost-effective management technique is a hallmark at Story Capital. We cannot control markets but we can control costs for our clients.
2. Continuous Tax Management:
We use specialized technology to continuously harvest short-term individual security losses to wash against portfolio gains for maximum tax-efficiency that can add between 40 and 80 basis points of return per year over a non-tax managed portfolio. * Our team helps charitably-minded clients to harvest and donate appreciated securities to maximize the tax effectiveness of their charitable giving. Our clients generally don’t use checkbook philanthropy. This double-benefit, tax optimization is a powerful strategy.
3. Impact Investing:
Using individual securities, we can now create portfolios which align with our clients’ values through a process called “Impact Investing.” Our clients may choose as many as 11 value-drivers from a growing list of 17 value-driver characteristics to create better values alignment between themselves and their portfolio. Statistically, this alignment of personal values with corporate social impact can be achieved without adversely impacting portfolio risk or performance against the chosen tracking index.
4. Special Function Portfolio Design:
Many of our clients have diversified portfolios with: 1) significant accumulated capital gain or 2) they have highly concentrated portfolios in one or two individual securities. We use a customized process of tax-loss harvesting, and creation of an annual “gain budget,” to proactively and tax-efficiently achieve diversification of concentrated positions or work out of high gain portfolios. Clients do NOT have to liquidate existing gain positions to bring assets under management at Story Capital.