The annual return of a portfolio cannot be calibrated or controlled exactly.  There is a multitude of known systematic and asystematic factors that contribute to the behavior among asset classes and sub-strategies within a portfolio, not to mention the impact from all the unknown factors.  At Chao & Company we understand that, under normal circumstances or market conditions, each asset has a distinctive set of behaviors.  However, under distressed or extreme market conditions, assets behave in a similar manner and the relationships among asset classes break down (the benefit of diversification is lost).  Since we cannot time "fat tail" or extreme events, we can only rely on a prudent process in portfolio management.  As such, our investment management process is divided into six main steps:

Investment Management Approach


STEP 1:

Identify a clear set of investment objectives based on client's investment criteria such as risk, expected return, liquidity needs, tax considerations, and time horizon, among other personal, financial and emotional factors. Then a formalized investment policy that summarizes the investment approach is prepared and agreed to by the client.
 

STEP 2:

Asset allocation is the most impactful and important decision in managing a portfolio. As such a generic, benchmark index-based neutral portfolio is constructed with a “core-satellite” asset allocation.


STEP 3:

Applying a forward looking secular global macroeconomic overlay, an index/passive beta “core” is created for the portfolio.  This core segment is expected to be the long term hold for the portfolio.


STEP 4:

The “satellite” portion of the portfolio is designed using alternative asset classes (commodities, real estate etc.) and alternative strategies to either expand on the portfolio allocation and lower portfolio volatility or to enhance portfolio return or add alpha through an active manager.


STEP 5:

An investment or implementation schedule is designed to systematically invest the assets based on the cyclical market outlook.
 

STEP 6:

We ensure our clients’ portfolios continue to meet their stated objectives by rebalancing and making periodic tactical changes as needed based on both secular and cyclical views of the market.  Transparency is a priority through ongoing portfolio monitoring and reporting.