Our Investment Process

Investment Philosophy

Modern Portfolio Theory (MPT) arose in the 1950s. MPT still remains the industry status quo for asset-pricing and asset allocation procedures. Mean Variance Optimization (MVO) and the Capital Asset Pricing Model (CAPM) are at the core of this “modern finance” still used today for designing investment portfolios.
As anyone may imagine, other theories and portfolio construction approaches have since emerged to advance MPT forward. HighTower|Scottsdale has embraced and selectively integrates the “best of class” of these empirically evidenced- based theories into our Liability Derived intelligence – LDintelligence™ portfolio construction methodology. LDintelligence is an asset/liability approach to portfolio construction as explained below. As a substantial Investor and/or fiduciary this advanced portfolio construction is available to you today.

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Risk Control Priority

Prudent risk control is at the core of our institutional and private client investment management services. We utilize our “Balancing the Balance Sheet” approach to design strategies that support our clients’ cash flow needs while helping proportionately reduce their risk exposure.

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Asset/Liability Approach

Liability Derived intelligence™ portfolio construction begins with identifying the investor’s Liability Derived index - LDindex™. The LDindex™ links the investor’s assets to their growth and cash flow liabilities for meeting current and future financial goals.

We believe Advanced Portfolio Construction attributes and the LDindex™ approach provide better procedures for better investor-outcomes. The LDindex™ defines an investor’s income, inflation protection, growth and liquidity needs while also monitoring portfolio risk exposures. The LDindex™ approach is also responsive to capital markets, as well as changes in investor circumstances. These event-driven investing considerations are designed to help avoid emotional hazards of market timing and other potentially destructive investment decisions. Lastly, this process monitors and periodically rebalances for dynamic changes that occur on both sides of the investor’s balance sheet due to changing economic and capital markets environment.

Portfolio Construction Process

HighTower | Scottsdale provides access to  sophisticated investment management consulting, fiduciary services, lending, cash management, and portfolio construction capabilities. HighTower’s open-source to multiple vendors also provides  access to more robust resources for your financial needs. These tools, combined with our open source architecture, enable HighTower | Scottsdale to provide customized strategies that are objective, unbiased, and transparent for each client’s unique financial circumstances.

Balancing your Balance Sheet

We work with Investors to analyze and understand both sides of their balance sheet. First, consideration is given to understanding the Investor’s liabilities (expenses); the financial goal. Next we inventory the Investor’s assets to determine how the assets should best be structured to obtain this financial goal with the least amount of risk.
These two balance sheet considerations identify the “targeted return” (actuarial assumption), as the necessary reference point for achieving the financial goal, which is overlooked in MPT. This necessary targeted return is what we refer to as the Investor’s Liability Derived index–LDindex™. This asset/liability modeling approach provides the architectural design for structuring the Investor’s most suitable portfolio with aim on the targeted return needed to achieve the financial goal.

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Strategic Asset Allocation

Our LDintelligence™ portfolio construction methodology is designed around your LDindex™. LDintelligence™ uses a Conditioned Value at Risk (CVaR) framework within an Upside Potential/Downside Risk optimizer for our strategic asset allocation modeling. LDintelligence™ is derived from the work of multiple Nobel Prize Laureates (Markowitz, Sharpe, Miller, Scholes, Merton, Kahneman, Fama) and other globally renowned academics and practitioners. The LDintelligence™ process results in a more robust and effective way to manage downside risk.

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Tactical Asset Allocation

We utilize a top-down approach as a tactical overlay driven by economic and investment trends. This overlay influences the tactical asset allocation tilts for all five LDindex™ model portfolios. We adopt a defensive, neutral or optimistic sentiment relative to the economic and capital markets environment. Furthermore, we implement global liquid alternative investments, absent implied leverage, to buffer portfolio volatility and downside risks.

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Style-Derived Active and Pure Style Significance

LDintelligence™, through the use of MPI™ patented style analysis, accepts the empirical evidence that most Style-Derived Active managers are not 100% style pure as industry labeled. This style deviation is for various valid reasons in managers’ attempts to outperform their style benchmarks. However, their portfolio’s actual underlying style blends should be identified for more accurate portfolio analysis (i.e. alpha, beta) and accounted for when implementing their active management into the investor’s recommended asset allocation construct. To address this issue, LDintelligence™ integrates “style pure” indices.

• Enhanced asset allocation optimization by using mutually exclusive and exhaustive fundamental-factored (“smart beta”) weighted style pure indices

• More accurate active manager skill evaluation to better identify active managers’ added value (alpha)

• Greater assurance of intended asset allocation adherence when blending Style-Derived Active and Passive (index) managers into the investment portfolio implementation

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Passive Indexing

We integrate Passive (index) investments to budget active Fundamental-Weighted investment vehicles, but tactically integrate capitalized-weighted Passive (index) investment vehicles as well.

We believe these advanced portfolio construction methodologies create better-built portfolios with greater integrity relative to the investor’s LDindex™ targeted return objective, as well as a greater chance of better financial outcomes toward achieving each investors’ financial goal. Request the LD intelligence™– LDi™ Briefing paper for a more detailed explanation.

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Core/Satellite Structure

LDintelligence™ portfolio construction is a “Core/Satellite” structure consisting of an optimal blend of non-proprietary Factor-Derived, Style-Derived Active and Passive (index) investment vehicles. Investment selection is done via a “truth-in-labeling,” style-pure analysis involving complex quantitative screening procedures. We also consider qualitative criteria such as an investment management firm’s people, philosophy, process and performance.

The LDintelligence™ Core/Satellite structure is designed to obtain some of the most effective and cost-efficient portfolio solutions.

CORE: Factor-Derived Active Investments

SATELLITE: Style-Derived Active, Passive (index), and alternative investments are optimally blended around the Core