We closely monitor the valuation of each asset class. Our valuation analysis is a two-part process. First we compare the relative valuation between the various classes in the portfolio. The second step is to then look to the longer-term historical valuation within each asset class.

When we identify a significant valuation differential between assets classes on a relative basis, we then look to the historical range of valuations for each asset class. If we find the relatively overvalued asset class is also in the high range of historical valuations, then we will underweight that asset class in favor of the most undervalued asset class. The primary consideration in making this change is risk reduction. The more overvalued an asset class, the more likely it will eventually revert back to a more normal valuation. Generally, the undervalued asset class also will perform quite well because it too reverts back to its more normal higher valuation.

An overvalued asset class is often the most popular at the moment. The overvaluation plus the popularity generally mean this asset has the highest risk going forward. Our disciplined process is designed to avoid being caught in the herd mentality. This discipline is paramount since our primary objective is to minimize risk.

Our investment policy dictates that we will only overweight or underweight an asset class by up to a maximum of 10%. The primary objective of the asset class weighting changes is to add value by reducing risk. Any further over- or underweight may actually increase risk by decreasing diversification. This is an extremely important consideration. We do not make large bets on any single asset class or attempt to predict the direction of the market. And above all; we do not believe in, nor do we attempt to, ‘time the market’ by moving in and out of the market. Our philosophy is to be fully invested at all times.

Investment managers utilize many techniques to evaluate stocks. However, in the simplest form there are two basic styles of equity investing: growth and value. Buying stocks of companies where the earnings are increasing rapidly is called growth investing. The most common type of value investing is buying companies at low price-to-earnings ratios or at low price-to-book value ratios. There are many variations of these styles. A combination of the two styles is commonly referred to as a blend style and has some elements of both.

Within each equity asset class we carefully monitor the earnings. The level of earnings and the growth rate of earnings will vary in each asset class. If the earnings outlook within a particular asset class is positive, we may elect to skew the security selection toward the growth style. If the earnings prospects overall for the class are not strong, we will emphasize value. Each asset class may have differing earnings and earnings growth prospects. Therefore, the style emphasis may be different between the asset classes.

We consider bond style based upon the average maturity of the bonds, or specifically, the duration. Investment managers generally classify duration on bonds into short, intermediate or long duration. The duration or average maturity of bonds reflects their sensitivity to changes in interest rates. Our interest rate outlook will determine whether we opt for a longer or shorter average maturity across the bond asset classes. If we feel it is likely interest rates will go down, we will slide toward longer duration bonds. If we believe rates may increase, we will skew more toward the shorter duration bonds.

In equities, our investment policy allows us to take a maximum of a 75% style bias in any single asset class. If we do not have a strong conviction on a style within a particular asset class, we will structure a neutral or blend position within the class. In bonds we will generally use a 100% allocation to the chosen duration within each asset class. We do not consider Real Estate or Commodities to have distinct styles within the asset class.