The old saying goes, if life gives you lemons, make lemonade. But the phrase seems to overlook one important question, is the juice worth the squeeze?
For institutional investors looking to increase returns without dramatically altering the risk makeup of the portfolio, the same question should be asked, says Mark Scheffler, senior portfolio manager and founder of Appleton Group Wealth Management.
Scheffler, whose firm manages approximately $60 million for private clients, believes his firm’s focus on risk management will be an attractive investment opportunity for institutions and has begun to market the firm to this space.
“We are definitely built to be more on the risk management side,” he said, adding that the firm has built itself out over the past several years specifically in preparation for entering the institutional marketplace.
Schffler said he has also been intrigued by his initial introduction to the emerging manager space.
“The really refreshing thing about the emerging manager space is that emerging managers really get it. I think that more than anything, because of a relatively small asset size, you can be nimble,” he said.
Scheffler said he believes there are two common market cycles – one that rises 10% or more and one that falls 10% or more – and he has built his portfolio to capture as much of both ends as possible.
Scheffler said he uses ETFs to gain exposure to equities, fixed-income and real estate, which allows the firm to implement its discipline very effectively.
“We’ve started at the point in time when ETFs were just starting to get on the radar screen,” he said. “Those are tools that are very powerful in gaining or reducing exposure.”
Scheffler said he looks at what institutions are doing with their money in either supporting ETFs in particular markets or not supporting ETFs and assesses whether there is enough support to continue to hold a particular ETF depending on the tide.
The process is purely quantitative, with the heaviest weighting given to institutional money flow.
That measure, combined with 30 and 50 day moving averages, “can give us enough data to make reasoned and well thought out decisions regarding asset allocation,” he said.
The portfolios have a standard allocation of 55% to large-cap, 25% to small-cap, 20% to high-dividend paying stocks.
