What Frontier’s strategy is…and is not

This is probably no surprise, but I thoroughly enjoy talking about investing strategies with people.  I’ve realized over the years, however, that most don’t share this interest.  In fact, most are happy to know as little as possible about the strategy(ies) employed within their own portfolio and prefer to find someone they trust to deal with all of it on their behalf.  I respect that, and I truly appreciate it when I fill that role on behalf of Frontier clients, but I feel very strongly that all investors should have at least a general understanding of their investment strategy(ies).  Doing so will help one maintain confidence in it over time and hopefully be a check on the portfolio manager, to the degree that’s necessary.  So in that vein, I wanted to offer a short reminder of what Frontier’s strategy is and is not, hopefully buttressing your confidence after a year where your portfolio may have fallen short of its benchmark.

What the Frontier investment strategy is:

  • Low turnover – I put a lot of thought into portfolio positioning and will only change holdings for three reasons: the global economy is demonstrably evolving in a new direction, a necessary and superlative investment tool becomes available, or I’ve made a mistake. All three are rare, so changes in Frontier portfolios occur at a glacial pace.  The benefit of low turnover is a more predictable, transparent, and less costly portfolio.  It can be unsettling for those who think successful investing is all about doing something, but the truth is that successful investing is more about doing as little as possible for as long as possible.
  • Tax efficient – Frontier portfolios are built primarily with exchange-traded funds (ETFs), which are extremely tax-efficient due to their creation/redemption structure. I won’t go into how this works here, but ETFs are far more tax-efficient than mutual funds, which tend to pass along unwanted capital gains each year whether an investor has sold anything or not.  The flagship fund of one of my former employers just distributed $10.13/share, over 20% of the fund’s value, at the end of 2014…in a year where it underperformed it’s benchmark by over 8%!!  Mutual fund analysts expect last year to be one of the worst on record for capital gains distributions by mutual funds.  Frontier’s portfolios are insulated from this unwanted tax event and the ETFs in which we invest have yet to distribute any realized capital gains to shareholders.
  • Growth-oriented – our portfolios are designed to grow client assets. That can be a bad thing if you are only looking for capital preservation because it means you are taking on a certain level of risk that you may not desire.  But I have that discussion with clients before they become clients so there are no surprises.  The benefit is that we target the risks that are most likely to result in asset appreciation over time.  We diversify broadly so we minimize individual security/business risk, but we embrace the markets that have demonstrated (and where we believe they will continue to demonstrate) stronger growth than others.  If successful, clients and their beneficiaries will see much greater wealth in the future but with no more risk than necessary.
  • Transparent – again because of the ETF structure, Frontier clients know exactly what is in their portfolio every single day. ETFs have to disclose their holdings daily, whereas mutual funds only have to disclose quarterly, and even then with a 30-45 day lag.  Not only does this pose a problem from a risk perspective, it also makes it impossible to avoid overlap within the portfolio.  Frontier portfolios have zero overlap across asset classes, so we are fully in control of the risks we are taking on behalf of our clients.  Full transparency also eliminates concerns that a portfolio manager is engaging in “window dressing”, or moving securities in/out of the portfolio in order to look better to investors at the end of a quarter when holdings are disclosed.  If nothing is hidden, all is known, as it should be.
  • Mostly passive – while the Frontier strategy itself is by definition active, which is to say a Frontier portfolio looks different from the overall market due to portfolio manager decisions, we are building the portfolio using passive tools. That means the underlying pieces will get their respective markets’ returns, no more, no less.  But since two-thirds of those attempting to beat their market actually underperform (last year it was closer to 80%!), this is a much better way to construct global portfolios.  It’s been shown over and over again that the way most folks manage money is ineffective and damaging relative to a passive approach, and I can attest to that fact from experience, so why engage in what doesn’t work?
  • Inexpensive – because of the efficiency of the ETF structures used to build the portfolio, the cost of a Frontier portfolio is a small fraction of the industry average. The underlying expense ratio of a Frontier portfolio is less than 0.18% and shrinking every year.  That means more of your money remains in the portfolio working for you and compounding with the markets.
  • Elegantly simple. I’m a big believer in the beauty of simplicity.  Einstein used to say, “as simple as possible, but no simpler.”  Smart guy.

What the Frontier strategy is not:

  • Speculative – in my opinion this describes most strategies out there. They bett on short term predictions that have as much a chance of being wrong as right, and after costs they have a far greater chance of detracting value.  And it gets even worse as a typical portfolio manager outsources most of the portfolio to other portfolio managers, which turns it into what I call a speculation-squared strategy.  Not a good way to manage other people’s assets.
  • The kitchen sink – the portfolios that come to me usually have 15-30 various funds in them. It’s an attempt to cover all bases and expose the investor to everything under the sun.  They are described as “diversified”, but it’s quite the opposite.  The reality is that there tends to be considerable overlap from fund to fund, so what was meant to be diversifying actually increases risk.  Additionally, much of this “diversification” is nothing but low-growth, which eliminates the purpose in this portfolio manager’s opinion.
  • Short-term – we don’t get overly concerned with all the short term issues that preoccupy most money managers.  Basically anything mentioned on CNBC, Bloomberg, or Fox Business News can be ignored since it’s either speculative or short-term, or both.  What we care about are things that affect the long-term direction of asset classes and their interrelationships.  Short of that, the news is just noise.
  • Worrisome – the idea of full transparency, long-term thinking, and elegant simplicity is to remove the stress that normally accompanies a growth-oriented portfolio. Investing doesn’t have to be gut wrenching, but unfortunately for most that’s exactly what it is.  Hopefully  not for Frontier clients.
  • Composed of anything on FINRA’s watch list – FINRA, the brokerage world’s regulatory body, maintains a watch list of troubling strategies. On the list currently: smart beta, alternative mutual funds, variable annuities, non-traded REITs, structured products, and floating-rate bank loan funds.  None of those make investment sense and never had a shot of getting into the Frontier strategy, yet millions of investors are invested in them.  Why?  Because these kinds of products are sold, not bought.

While that doesn’t explain everything, I think it hits the high points.  Keep this piece handy if you ever forget what we’re trying to accomplish.  And don’t hesitate to get in touch if you’d like me to elaborate on anything in here.

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