Modern Portfolio Design
How do we diversify in today's markets?
The traditional methodology for creating “diversified” portfolios is to allocate to a number of different asset classes such as US equities, foreign equities, emerging market equities, US bonds, foreign bonds, and commodities. At one time, that was sufficient, but times have changed. This type of diversification does little to protect in times of severe market turbulence as asset classes tend to be highly correlated at these points. The Great Recession taught many of us that markets change quickly and we need to be proactive in protecting client assets. As such, this traditional diversification strategy, passive or active, fails to hold up to this fast paced, modern market. So, how do you protect your clients from market turbulence, algorithmic trading, or high-frequency trading programs? It’s not just humans you’re competing against!
Forecast Capital Management uses Modern Portfolio Design (MPD). There’s a true need to diversify outside of asset classes alone. MPD uses multiple managers, multiple methodologies, multiple strategies, multiple time frames, and multiple asset classes. Concentration in a particular strategy, manager, or methodology is liable to risk client capital with singular failure. Although, concentration of a particular approach may provide massive upside in a very specific market environment, the risk involved in placing the entire portfolio with one manager, strategy, or methodology is massive. Concentration results in large, volatile swings where the entire portfolio is subject to underperformance. All strategies, managers, and methodologies fall out of favor and underperform at certain times, but that does not mean your portfolio has to. By using the Modern Portfolio Design approach you are setting the stage for consistent, long-term results. Although volatility can’t be avoided, it can be mitigated while participating in bull markets and preserving capital during severe market downturns.
What is Modern Portfolio Design?
MPD goes further than your traditional asset allocation strategy. Modern Portfolio Design uses:
- Multiple Managers
- Multiple Methodologies
- Multiple Strategies
- Multiple Time Frames
- Multiple Asset Classes
...and we do this all within a single portfolio!
There are three primary tenets to our philosophy:
- You must adapt to changing market environments.
- You must focus on what’s driving the market.
- You must manage risk appropriately.
The goal of Modern Portfolio Design is to protect client capital. We like to think of client capital as being permanent or irreplaceable. Unfortunately, the old tried and true asset allocation strategy does nothing to protect a client’s assets in today's global economy. We provide clients a modern approach to TRUE portfolio diversification. Although, there are never any assurances in investing, the overarching goal for our portfolios is to provide consistent, long-term results.
The Forecast Capital Management Process
Our process is well-defined and transparent. We believe the process should be easily defined and repeatable. Education is the key to transparency and we want to help you understand our investment process and strategies because these important financial decisions have a direct impact on your future. Once you have a thorough understanding, we’ll make recommendations on strategy allocations and implement your personalized plan.
Step 1: Define client goals
Step 2: Define client risk parameters
Step 3: Develop a customized client benchmark
Step 4: Identify the preferred investing Styles/Methodologies to be used
Step 5: Identify the preferred Strategy Types within each style/methodology
Step 6: Create your Modern Portfolio Design.
Disciplined investment strategies are the foundation of our investment management process. Our process-driven, time-tested strategies are managed by our investment committee, comprised of a dedicated team of portfolio managers as well as fundamental and technical analysts and strategists.
Below is an example of our Modern Portfolio Design technique in action.
Investor Profile - Aggressive Growth
Account Size - $250,000
Risk Management Objective - Long-term, bear market risk mitigation
MPD Methodology Allocation
In the sample allocation shown above, there are 4 different investing methodologies (strategic allocation, equity selection, tactical allocation, and alternatives), 4 different strategies (not shown), and 3 different investment managers contributing to the overall portfolio.
The overarching goal of an Modern Portfolio Design is to create a modern investment solution in order to provide the benefits resulting from multiple managers, strategies and methodologies while guarding against a “singular failure” and to manage the volatility related to a concentrated portfolio approach.
Forecast has three model tiers which have been designed to meet an array of goals, risk tolerances, and account sizes.
The Forecast Capital Management Strategies
THE FORECAST GLOBAL MACRO STRATEGY
A risk-targeted series of liquid alternative portfolios focusing on a discretionary, global macro management approach. Management seeks to first identify the primary themes occurring from a global macro perspective and then position the portfolio accordingly. This strategy invests in a wide spectrum of assets (equities, fixed income, commodities, & currencies) across multiple geographies based on the manager’s evaluation of macroeconomic developments. This strategy seeks to generate returns that are uncorrelated to traditional asset classes, which can increase a portfolio’s diversification. There are three risk targeted portfolio offerings: Conservative, Moderate, and Aggressive.
THE FORECAST STRATEGIC LEADERS STRATEGY
Strategic Leaders is a series of multi-methodology, multi-strategy asset allocation portfolios. The series incorporates passive, strategic, and tactical methodologies – all in a single portfolio. Each asset class category utilizes a passive “core” holding as well as tactical leadership strategies, which are designed to dynamically adapt to changing market environments. There are four risk-targeted portfolio offerings: Conservative, Balanced, Growth, and Aggressive.
THE FORECAST TACTICAL ASSET ALLOCATION STRATEGY
A longer-term, risk-managed, tactical allocation strategy designed for growth-oriented, stock market investors. The program strives to: (a) seek capital appreciation during positive environments, (b) preserve capital during severely negative market cycles, and (c) utilize a reduced-risk profile when market indicators are not aligned.
The strategy is driven by two comprehensive market models: technical and fundamental. When both models are positive, a growth-oriented stance is taken (100% long the U.S. stock market). If the strategy’s “Leverage Trigger” is “on,” the portfolios may take a more aggressive position via levered funds/ETFs. When both models are negative, the strategy moves to the safety of a money market position. And finally, when the models disagree, a “reduced-risk profile” is utilized (60/40 stock/bond). In sum, this “core” risk managed strategy seeks to keep exposure in tune with the primary market cycle and to manage the risk of the overall risk/reward environment.
THE FORECAST EQUITY LEADERS STRATEGY
The Equity Leaders Strategy is an actively managed, growth oriented, individual equity portfolio designed to focus on the top-rated stocks (as defined by a proprietary measure of company/industry performance and earnings strength) within each market sector. Instead of focusing on the biggest companies in a sector - as the S&P 500 does - the Equity Leaders Strategy strives to own the top-rated stocks within each S&P sector.
Each week, every stock in our universe, which is made up of ~1300 of the largest, most liquid stocks traded in the U.S., is ranked in terms of earnings strength and company performance. In addition, the system ranks 11 market sectors, 24 industry groups, 68 industries, and 157 sub-industry groups for performance and momentum. Our system for determining a company’s earnings strength and performance. The portfolio is risk-managed, with the ability to raise cash in severely negative market conditions.
THE FORECAST EQUITY INCOME STRATEGY
The Equity Income portfolio is a large-cap, individual equity/ETF portfolio designed to own dividend-paying stocks. The portfolio strives to provide long-term capital appreciation with a modest degree of income. The Dividend Equity portfolio targets dividend paying stocks, primarily those that have increased their annual dividend payouts over long-term (5+ year) periods, have experienced notable earnings growth, and/or have attractive technical and fundamental setups. In addition to holding individual dividend-paying stocks, the portfolio holds 20% of its total exposure in Dividend ETFs, which may provide more predictable returns and less performance variance.
THE FORECAST FOCUS HIGH YIELD STRATEGY
Designed for income and growth-oriented investors, the Focus High Yield program actively manages the risk/reward relationship of the high yield bond market. The program strives to maintain an invested position in the high yield market via index ETFs and/or mutual funds during positive market environments and to reduce exposure to risk during negative market environments.
THE FORECAST FOCUS FIXED INCOME
Designed for income and growth-oriented investors, the Focus Fixed Income program actively manages the risk/reward relationship of the fixed income market. The program looks to take advantage of opportunistic shifts to allocations across a broad range of fixed income investments. This program may be appropriate for those looking to generate income through various investment opportunities in the bond market.
Forecast Precious Metals
Invests in companies involved in the exploration, development, mining, processing, or dealing of gold, precious metals, and minerals which tend to have a relatively high correlation to the underlying commodity prices and relatively low correlation to the prices of other stocks and bonds. The strategy takes a disciplined approach to risk management through top-down analysis and bottom-up stock selection, while diversifying across market capitalizations, production profiles, and geographies. The strategy focuses on a longer-term investment horizon, looking for companies that have lower-than-average cost structures, are well-managed, and are likely to improve their relative value over time. This strategy takes a disciplined approach to risk management that provides notable upside potential when equity markets are volatile thus acting as a hedge against equity market risk and uncertainty.
The Forecast Capital Management Models
Forecast Capital management G1 models
forecast capital management G2 models
forecast capital management G3 models
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