Clients of Dattilio & Ash Capital Management (D&A) rely on our expertise to manage their investment portfolios and help them achieve their unique investment goals. These goals can vary from preparing for retirement decades down the line to generating current income to support their desired lifestyles. To provide clients with insights into their portfolio's performance, D&A utilizes a selection of risk-targeted iShares exchange-traded funds (ETFs) as benchmarks.
D&A employs Conservative (AOK), Moderately Conservative (AOM), Growth (AOR), and Aggressive (AOA) iShares ETFs as benchmarks for many client portfolios. These ETFs, managed by iShares, reflect base case investment portfolios comprising stocks and bonds. However, it's important to note that the risk profiles defined by these iShares ETFs may not perfectly align with individual client situations.
For instance, the Growth ETF (AOR) generally targets a 60% equity and 40% bond asset allocation, with a substantial allocation to international equities and some international bonds. While this ETF provides a "diversified" portfolio, it fails to capture the nuances and tailored approach that individual clients may require.
One notable limitation is that its U.S. equity allocation only includes a proxy for the S&P 500, neglecting exposure to small- and mid-cap stocks, which can potentially outperform. Additionally, it does not explicitly customize the equity allocation to overweight equities with lower risk profiles for less aggressive investors, nor does it account for thematic equity plays, such as investments in emerging technologies. In the bond space, the sole allocation is to core bonds, overlooking the benefits of a diversified fixed income approach that includes credit and duration risk management.
Therefore, when a client portfolio underperforms its iShares "benchmark," it is important to recognize that the portfolio differs from the benchmark for valid reasons. As readers of this blog are aware, the S&P 500 has outperformed other major asset classes in recent years, albeit with high volatility. However, it is rare for professional investment managers to allocate long-term investment strategies solely to the S&P 500. Instead, they diversify risk by including other equity markets, bonds, and various asset classes.
At D&A, we take a customized approach to each client's portfolio, considering their specific risk tolerance, investment goals, and individual circumstances. Our aim is to optimize the portfolio's performance based on a comprehensive understanding of the client's needs rather than solely relying on generic benchmarks. By tailoring investments to our clients' unique situations and preferences, we strive to achieve long-term success while managing risk effectively.