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Rating Systems and Target Rate of Returns

Show Description:

Jason and Alex started off the show by welcoming Jim Pupillo, a Senior Wealth Adviser at IDA, who has a ton of industry experience, and specializes in providing his clients with regular Fiduciary advice pertaining to the company retirement and private wealth areas of the business. Jason discussed how the IDA investment committee spends countless hours stress testing and analyzing the asset allocation of the client portfolios to make sure that they are optimized given the current environment. Jim and Jason discussed how the rating systems for investment funds is not always the best aspect of analysis to be looking at when choosing investments.

Jim discussed how you cannot just use the star rating of a mutual fund solely and then pick investments for a portfolio. There must be a comprehensive analysis done using numerous different metrics to make sure you know exactly what area of the stock and bond market that fund is targeting. He explained that this is a crucial step in building a great asset allocation. Jim explained that the ratings agencies use either returns based style analysis or holdings-based style analysis, and those are used to determine the fund attributes or factors of a specific fund. Jim also used a great analogy comparing building the appropriate investment asset allocation to building a cake, and you must have the right pure ingredients (factors), proper allocation amounts, and right mix of investments to have a well-built cake.

Alex explained how it is our job as a Fiduciary investment management team to filter all the available information and investment options down through a well thought out, precise process to build our client portfolios. Jim stressed the importance of finding a professional who truly knows how to use these investment analysis tools because if they don’t it is like giving a machine gun to a toddler and hoping for a positive outcome. Jason chimed in and said that a lot of investment advisors at some of the larger firms are still constructing portfolios how they were building them back in the 90s and early 2000s, and with no care and concern for allocations to specific factors. Some examples of factors are size, value, momentum, minimum volatility, quality, and profitability, and these specific factors play a crucial role in constructing an investment portfolio. These factors allow us to extract returns from the global financial markets in a well-diversified manner to achieve the maximum risk adjusted returns for our clients.

Jim and Jason explained what liability driven investing is and the process of solving for a clients required rate of return. This is so important in the financial planning process to make sure that IDA clients live a financially peacefully life.

In this show you will learn about:

– Importance of proper mutual fund analysis.

– Role of a Fiduciary investment management team in fund analysis and information siphoning.

– What is factor investing and why this is extremely important.

– The importance of investing to achieve a target rate of return.

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