Mr. Vollaro: Pinnacle Advisory Group is a wealth manager, and our mission is to provide the best of both financial planning as well as tactical money management. We currently serve over 600 clients and manage nearly 700 million of client assets. When our clients first come on board, they typically start out working with our wealth managers, who give them a comprehensive financial checkup. Our planners combine quantitative and qualitative analysis of a client's financial health with the risk tolerance of the client, and those inputs allow our planners to pick out the appropriate investment policy for our clients. At Pinnacle we run five different dynamic models that range from ultra conservative to ultra aggressive. The models we run are called dynamic because they will move in real time based on the view of our investment team. This is different than many planning-based firms that follow modern portfolio theory and believe in strategic asset allocation. At Pinnacle we do a lot of homework to come up with a view, and that view is the basis for our allocation at any given point in time.
I'm currently the Portfolio Manager for two of our models and the Senior Analyst on the remaining three. I also hold a minority equity interest in the firm, and serve in a management and executive capacity.
TWST: Would you take us through the process beginning with asset allocation?
Mr. Vollaro: There are a few different points to be made. First off, I want to make clear the type of money manager that we are, and as part of that process also help clarify what we aren't. We are relative value managers, which means our model portfolios each have theoretical benchmark portfolios that define the risk and expected returns parameters of each model over a long-term time horizon. It is our job to beat those benchmarks over time, with less risk than simply owning the benchmark. Our benchmarks are composed of varying percentages of the S&P 500 and the Barclays Aggregate Bond Index. Tactical can also be a very ambiguous word, so let me define what tactical means for us. Tactical means we have the latitude to change our broad allocations and move the percentage weightings we own in equity, fixed income and alternative investments. It also means we have freedom and flexibility to buy what we want at the intra-asset-class level. We can attempt to add value by moving in and out of equity sectors and industries; we can target different levels of market beta, credit qualities and duration of fixed income markets. And we are always on the hunt for unique or eclectic managers and strategies that we believe might make good alternative investments. Lastly, our bottom-up analysis on each security we own should lead us to selecting the highest-quality securities within the universe we are targeting. That bottom-up analysis looks at construction, expenses and liquidity.
Our dynamically changing view of the world is paramount in adjusting our portfolios, and so we put a heavy emphasis on continually adjusting our outlook by doing a lot of homework on macroeconomic fundamentals, technical analysis and traditional valuation metrics. These three building blocks lay the foundation for our market views and forecasts. The macro fundamental work we do focuses on consumer spending, housing, leading indices of growth, earnings, interest rates, currency, monetary and fiscal policy, and other measures of cyclical business cycles. Technical analysis combines elements of trend analysis, momentum, mean reversion and market sentiment. Our valuation work is comprised of traditional metrics, such as price to earnings, price to book, a number of interest rate-based measures and intrinsic value.
An exhaustive amount of work goes into forming our view. And once we have set it, we then have to express our outlook through the asset allocation of the portfolios. The amount of conviction that we have in our view will dictate how far we allow ourselves to get off the benchmark portfolio at any given time. When we have a lot of conviction, we give ourselves the flexibility to deviate materially from the benchmark. And when we don't, we stay tighter to our benchmark.
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