I hate to use the Nuremburg defense, but I only realized some time later that I was there in the beginning of the ruin of the financial landscape. My partner Tom Fant points back at a rash of failures of banks on Wall Street and identifies a pattern for their demise. The beginning of the end for these institutions was when they stopped doing customer business. When they built proprietary trading desks, managed hedge funds, took the good pieces of deal structures and sold the rest to the clients, they managed funds in a way that allowed them to manage more funds - as opposed to caring for their clients. At Atlantic, we have been very aware of this trend, and it is a major reason why we have been quietly outraged, and on our crusade to focus on the client – not the market.

A Relevant Portfolio Process

When my firm meets with clients, we discuss the 3 pillars of our investment philosophy that we believe will change the world. The power comes from its simplicity and its focus on achieving success for the clients:

Manage Your Investments in the Context of Your Goals

I have never met an investor that needed to beat the market, but I have rarely met a manager that wasn’t clearly focused on it. Have you ever met an individual or an institution that really truly needed to beat the Russell Mid-Cap Value Index, or the S&P 500 Large Cap index? So why are there over 1,500 mid-capitalization focused funds listed on Bloomberg if nobody really needs to try to outperform this arbitrarily constructed category?

Your goals are unique. Each client has a different requirement, but we realize that for each client, that pile of money serves a purpose. The purpose may be to provide for current income, or it may be focused on providing the means to a plan in the future. It may have accounting treatment particulars, or tax considerations, or even estate consequences. It may be governed by a board, a family council, or just a single individual who is intimidated by the complexity of all the traditional investment jargon and process. A friend of Bennet’s used to tell him, “Never forget, it’s their money”. We will never forget this at Atlantic.

Setting the goals is the most important part of managing a portfolio. How could you even begin to decide what to do without clearly identifying what you were trying to achieve? Frequently, there isn’t a single goal, but a combination of things that need to be achieved. And because there is no optimal portfolio, the goals must be prioritized in order of importance.

With an institutional client that we work with, income is the primary goal. However, this is subject to both specific accounting treatment, as well as unrealized gain/loss requirements relative to their balance sheet, as well as a process that satisfies their audit requirements. For a family that we work with, minimizing the amount of current income above a certain threshold that will be paid to the parent, while maximizing the growth of the assets (subject to capital preservation) is a mandate with a highly particular set of goals.

Under traditional portfolio construction, the investor would be given a rather sophisticated risk tolerance questionnaire, from which a computer would most likely discern the optimal portfolio mixture of stocks and bonds. Each asset class would then be properly diversified by market capitalization, growth/value styles, domestic/international, etc., then managers would be screened from a database using historical returns, until the portfolio was fully constructed. Rebalancing would continue as the market evolved, but the sanctity of the model would keep it in line for the long haul.