Our goal is to create an individualized tax- and
cost-efficient portfolio for each client’s unique personal, professional,
and investment situation. We Utilize long-standing
academic portfolio theory, combined with our 20+ years of Wall Street
experience in economic research, bond trading, and risk management. Our
investment philosophy utilizes the substantial body of academic work known as
Modern Portfolio Theory. We believe that markets are efficient. This
essentially means that we are not willing to spend our client’s valuable
time and money attempting to determine which investments will perform better or
worse in the future. There are many studies that illustrate the benefits of
“passive management” versus “active management”. In
short, stock-pickers and market-timers do not generate returns that are
significantly different than those that we would expect from random chance.
Instead, MCA focuses on the two variables clients can control:
Risk Management. We
analyze historical risk and return statistics for various stock and bond asset
classes. Using this data, we assemble portfolios comprised of asset class-specific
investments whose returns are lowly- or negatively- correlated to other
investments in the portfolio. We establish a specific percentage allocation for
each asset class based on statistical analysis and judgment. Once we establish
these asset class “targets”, we periodically rebalance the
portfolio. This enforces a discipline of “selling high” and
“buying low”.
Expense Minimization. This
includes advisory fees, fund manager fees, transaction costs, and, importantly,
taxes.
Although MCA employs a “passive”
investment approach and is philosophically aligned with index funds, we do not
typically use index funds based on S&P, Russell, or Dow Jones indices.
Instead, for equity investments, we rely primarily on institutional class funds
from DFA (www.dfaus.com).
There are some specific advantages of DFA funds over typical index funds:
DFA uses a broader universe of stocks in each
fund. This means that their funds more accurately represent each asset class,
than an index of selected stocks from a given asset class.
DFA does not attempt to mimic the return from one
of these popular indices, so they are not compelled to buy or sell specific
stocks at a time when all other index funds are rushing to execute the same transaction.
This timing phenomenon creates an
unnecessary expense for index funds, since the index fund manager
is required to buy when prices are artificially high and sell when prices are
artificially low.
DFA is unique in the industry for offering passively-managed,
asset class-specific funds that are available only to institutions and
DFA-approved advisors, such as Maryland Capital Advisors.