Portfolio Management Approach

We have seen lots of changes in the investing environment, especially over the last few years. One of the biggest changes has been in the area of passive investing. While actively - managed mutual funds has been the main way for the average investor to participate in the markets for 20 plus years there has been a shift as money has been flowing into low cost index investments at record levels. Low cost index mutual funds and exchange traded funds (ETF’s) offer a lower cost opportunity to participate in the equity and bond markets. Purpose Financial Planning LLC (Purpose) utilizes both passive and active investment strategies.

Using broad index based etfs for global equity investing is an efficient way to gain access at a low cost. However, managers who are able to see how changes in areas such as technology and health care (biotech) can potentially position their portfolios in a way that doesn't just follow the crowd on but on who are the new innovators . Additionally, some international markets have characteristics such as lower volume than their large cap weighted U.S. funds counterpart. As a result, some larger institutions may not even be able to participate meaningfully in these areas, simply because there are fewer shares available. This can make the market less efficient and then provide an opportunity to enhance returns and/or lower the overall risk of the portfolio for a professional manager.

Another area that we find active management especially important is in most areas of the bond market. A capital weighted equity index may give an investor the opportunity to invest at a low cost in some of the largest companies that have proven they can grow profits with reasonable debt. The same weighted bond index fund means that the investor is putting a higher allocation in governments and companies who are issuing a lot of debt. An active manager offers their abilities to take advantage of opportunities without having to invest in governments and corporations that issue the most debt. These issuers are often able to issue low coupon paying instruments which are also especially susceptible for interest rate increases. The active manager can find better risk/reward options in other areas of the bond market.