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Utilizing Proprietary Risk-Based Model Portfolios for Dynamic Investment Solutions

Executive Summary


At Intent Investment Management (IIM), we are driven by a singular mission: enriching the lives of a diverse clientele through innovative, technology-driven planning and investment strategies, personalized service, and a focus on inclusivity and education. As a forward-thinking, tech-enabled firm, we seamlessly blend cutting-edge technology with personalized service, crafting investment strategies that are as unique as the clients we serve. In a financial world that's constantly evolving, we stand committed to guiding self-employed individuals, business owners, and employees towards achieving not just their financial goals, but their life aspirations.


This white paper presents the cornerstone of our investment philosophy for publicly traded securities – our risk-based model portfolios. These portfolios are meticulously designed to navigate the complexities of the market, balancing risk and reward in a manner that aligns with each client's individual risk profile. Utilizing extensive data on risk and returns associated with the underlying Exchange-Traded Funds (ETFs), we construct portfolios designed to surpass broad market performance. Simultaneously, we focus on mitigating risk as we near the date when the client requires access to their funds.


Our approach is rooted in the understanding that investment is not a one-size-fits-all solution. While the allure of self-managed investments is undeniable in an era where information is at everyone's fingertips, the reality often falls short of expectations. Many self-directed investors find themselves caught in the pitfalls of being either too aggressive or too cautious, leading to suboptimal outcomes. Our white paper aims to explain how our risk-based model portfolios provide a balanced, informed, and strategically sound alternative to the uncertainties of self-management.


In the following pages, we will delve into the specifics of our investment philosophy, demonstrating through data, analysis, and real-world examples, why partnering with IIM represents a wise choice for those seeking to maximize their financial potential while mitigating risk. Join us in exploring how the fusion of technology and personalized expertise at IIM is not just shaping the future of investment advisory but is also empowering our clients to lead more fulfilling and financially secure lives.


Core Principles of Our Investment Strategy


Our investment philosophy is built upon four fundamental principles, each crafted to navigate the ever-changing financial landscape with confidence and precision.


Broad Diversification: Central to our strategy is the concept of broad diversification, not just across the traditional mix of equities and fixed income, but deeper into sub-asset classes. We ensure that equities are diversified across various dimensions - geography, industry, market capitalization, and style. Similarly, our approach to fixed income spans across different geographies, entities, quality, and duration. This extensive diversification is crucial in mitigating risk while capturing a broad spectrum of growth opportunities.


Dynamic Design: Our portfolios are dynamically designed to adapt to the investment horizon. This involves proportionally adjusting the risk within each sub-asset class. When the investment objective is further away, we increase exposure to higher volatility sub-asset classes for growth. Conversely, as the objective nears, we shift towards lower volatility sub-asset classes, focusing on capital preservation. This dynamic approach allows us to be responsive to market changes and client needs.


Multi-Manager Approach: We employ a multi-manager approach, selecting both active and passive managers for each sub-asset class. Passive managers are chosen based on criteria like low fees and tracking error, while active managers are selected based on factors such as manager tenure, investment process, and alpha. This blend of active and passive management strategies aims to optimize returns while keeping costs and risks in check.


Continuous Monitoring: An ongoing aspect of our strategy is the continuous monitoring and review of our sub-asset class design and the performance of our managers. This vigilance ensures that our portfolios consistently meet their stated objectives. Additionally, we are always exploring new asset classes as potential investments, ready to integrate them into our portfolios to seize emerging opportunities.


Understanding the Interplay of Risk and Return in Investments


The risk-reward tradeoff in investing can be understood using a simple analogy. Imagine lending money to someone you marginally trust. If they ask to borrow $50 and offer to repay $60 in two weeks, you might hesitate because the risk of losing your $50 may not seem worth the extra $10. However, if they promise to return $100 or even $150, the potential to double or triple your money makes the deal more enticing.


This analogy is a cornerstone of our model portfolio strategy. When there's a longer time frame before the investment goal, we increase our allocation in small-cap stocks and high-yield bonds, targeting higher potential returns by taking on more risk. This approach leverages the fact that our clients have a greater time span to ride out market ups and downs. Conversely, as the time to achieve the investment objective draws near, we tactically shift our focus to large-cap stocks and government and investment-grade bonds, taking on less risk and accepting lower potential return. This move is geared towards safeguarding capital, acknowledging our clients' impending need to access their funds for specific financial purposes.


The Interplay of Risk and Return within the IIM Risk-Based Model Portfolio


The following Risk/Reward Scatterplot provides a visual depiction of the performance dynamics within our risk-based model portfolios. By mapping the standard deviation against the annualized total return for each portfolio strategy over a five-year period, this graph illustrates the fundamental trade-off between risk and potential reward that is central to investment decision-making. Each point on the scatterplot represents a distinct IIM portfolio, offering a snapshot of how risk tolerance is balanced with performance outcomes.



Each point on the scatter plot represents a different investment strategy, ranging from 'Aggressive' to 'Conservative', plotted according to its standard deviation (on the x-axis) and its annualized total return (on the y-axis).


Standard Deviation (Risk): This is plotted on the horizontal axis and represents the level of volatility associated with each portfolio. A higher standard deviation means more risk because the investment returns vary more widely from the average.


Total Return (Reward): This is plotted on the vertical axis and represents the annualized return that each portfolio has generated over the five-year period.

The relationship between risk and reward is positive — higher risk is associated with for higher historical returns. The scatter plot shows that the IIM Aggressive portfolio, which has higher historical risk, also has a higher historical return. This is suitable for clients with a higher risk tolerance and a longer investment horizon.


Conversely, the IIM Conservative portfolio, which is plotted with a lower standard deviation, indicates less risk and also shows a lower return, aligning with the preference of risk-averse investors who prioritize capital preservation over potential high returns.


In the context of managing risk with IIM's risk-based model portfolios, the standard deviation is a crucial statistic. It helps IIM and its clients understand the historical volatility of each portfolio and select a strategy that aligns with the client's risk tolerance, investment goals, and time frame. By offering a spectrum of portfolios with varying levels of standard deviation, IIM can cater to a wide range of risk preferences and financial objectives, ensuring clients are matched with a portfolio that reflects their individual needs and risk appetite.


Portfolio Contruction


Our philosophy centers around creating bespoke, risk-based model portfolios that are finely tuned to align with each client's individual investment objectives. Our approach is both strategic and adaptive, recognizing that every investment journey is unique. The cornerstone of our investment strategy lies in the utilization of Exchange-Traded Funds (ETFs), which we categorize into two distinct groups: Broad Market Exposure and Enhancers.


Broad Market Exposure (BME) ETFs: Our Broad Market Exposure ETFs, comprising tickers VOO, VEA, VWO, GOVT, VTIP, BNDX, VO and VTC, form the foundation of our portfolios. These ETFs are carefully selected to closely follow the movements of the equity and fixed income markets, providing diversified market exposure. They serve as a crucial component of our portfolios, reflecting a wide range of market trends and offering a balanced mix of volatility levels that align with the market’s overall performance.


Investment Guideline: no individual BME ETF comprises more than 25% of a portfolio, and collectively, our BME ETFs are capped at a minimum of 75% of the total portfolio allocation.


Enhancer ETF: On the other hand, our Enhancers, including tickers DFAT, JSML, PSP, PBD, HYG, MBB, COMT, and BLDG, are selected to add dynamism and growth potential to the portfolios. These ETFs are integral for clients with longer investment horizons, where we aim to embrace higher risk for potentially higher returns. As the investment horizon extends, we increase the allocation to Enhancers, capitalizing on their ability to boost overall portfolio performance. We do not allocate more than 5% to a single Enhancer ETF and the total weight of enhancers can’t be more than 25% of the portfolio.


In adherence to our diversification strategy, no individual Enhancer ETF will represent more than 5% of a portfolio's total composition, and the aggregate allocation for all Enhancer ETFs is strictly limited to a maximum of 25% of the entire portfolio.


Investment Guideline: no individual Enhancer ETF comprises more than 5% of a portfolio, and collectively, our Enhancer ETFs are capped at a maximum of 25% of the total portfolio allocation.


Two Levers for Risk Management: Managing risk is a dual-faceted endeavor in our investment strategy. First, we modulate the overall equity and fixed income allocation within the portfolio, balancing between aggressive growth and conservative stability based on the client’s timeline and risk tolerance. Second, we fine-tune the exposure to our Enhancers - the higher-risk, higher-reward component of our portfolios. This dual approach allows us to navigate market dynamics effectively, ensuring that our clients' investments are both secure and poised for growth.


Our investment philosophy is characterized by its tailored approach, blending stability with growth potential. Through our strategic use of Broad Market Exposure and Enhancers ETFs, we construct model portfolios that not only align with our clients' unique objectives but also adapt dynamically to their evolving investment horizons, all while maintaining a vigilant focus on risk management.


After portfolio construction has been completed, there is a deliberate calibration of investment risk, from aggressive to conservative strategies, and the corresponding shift from higher-risk equities and bonds to those with lower-risk profiles. Our portfolio composition is aligned with the risk tolerance of our clients at each stage of their investment journey, reinforcing our commitment to a data-driven and client-centric approach to investment management. This can be seen in the stock style exposure of our equity allocation and credit quality exposure in our bond allocation.


This chart outlines the distribution of investments across different stock categories based on the aggressiveness of the portfolio. As portfolios range from aggressive to conservative, there's a clear shift from small-cap to large-cap holdings. For example, in the 'IIM Aggressive' portfolio, there is significant allocation in small-cap, which decreases progressively as the portfolios become more conservative, indicating a move towards potentially lower-risk, large-cap stocks. Conversely, the allocation to large-cap stocks increases as the portfolio moves from aggressive to conservative portfolio, highlighting a strategy geared towards stability and reduced volatility for more risk-averse investors.



This chart details the credit quality of bonds within the portfolios, with a higher percentage of higher-rated bonds (AAA, AA) in more conservative portfolios, indicating a focus on lower credit risk. The 'IIM Aggressive' portfolio starts with 8.03% in AAA-rated bonds, while the 'IIM Conservative' portfolio has a higher allocation of 28.32% in AAA-rated bonds. As portfolios become more conservative, there is a notable increase in AA and AAA ratings, suggesting a shift towards bonds with lower default risks and more stable returns, aligning with a strategy prioritizing capital preservation, especially for clients approaching their financial objectives. Conversely, lower credit quality bonds (BB, B, Below B, Not Rated) are more prevalent in the aggressive portfolios, reflecting a higher risk-return strategy.


Performance of the IIM Risk-Based Portfolios


In our investment journey, we acknowledge the inevitable ebb and flow of market trends —where aggressive portfolios may experience higher peaks and deeper valleys, and conservative ones tend to follow a steadier path. We advise our clients to look beyond short-term market noise and adopt a disciplined approach through dollar-cost averaging, which involves making consistent monthly investments. This strategy effectively evens out the investment entry price over time, reducing the average cost per unit and smoothing out market volatility.


We measure success not by whether the performance is strictly positive, but by how it stacks up against a relevant benchmark. Imagine a runner pacing themselves against a predetermined time; similarly, we evaluate our portfolios against a mix of benchmarks that mirror their asset allocation. For instance, our IIM Aggressive Portfolio, with a composition of 90% equities and 10% fixed income, is gauged against a blend of 90% MSCI ACWI and 10% Barclays Global Aggregate. This approach, known as relative performance, offers a more nuanced view of our portfolios' effectiveness. The upcoming table will demonstrate how each IIM strategy consistently surpasses its corresponding benchmark across various time frames on a net-of-fee basis.


The benchmarks chosen for our portfolios reflect our commitment to exceeding what an investor might achieve through a purely passive investment approach. We consider indexed exposure to global equity and fixed income assets as a baseline — a high-water mark that a well-informed individual might attain independently. As professional investment managers, our objective extends beyond simply matching this baseline. We aim to surpass the returns of indexing, even after accounting for all fees, effectively ensuring that our services offer tangible net value.


Moreover, our role as advisors goes beyond portfolio construction. We provide comprehensive financial planning services, offering strategic guidance on account structuring tailored to support our clients’ life goals and aspirations. From navigating tax implications to estate planning and retirement forecasting, our value proposition includes a suite of services designed to secure not only your financial growth but also to facilitate the realization of your long-term personal and financial ambitions. By partnering with us, clients gain the assurance of a sophisticated investment strategy coupled with holistic financial oversight, laying a foundation for a secure and prosperous future.


Case Study – Navigating the Wealth Maze


Let’s look at the journey of a high earner who faced considerable uncertainty regarding their financial future. Initially burdened with unclear retirement goals, multiple unconsolidated 401(k) accounts, and significant equity compensation held in cash, the client's financial outlook was one of stress and missed opportunities.


We addressed these challenges head-on. We crafted a comprehensive, customized financial roadmap, consolidated the client's numerous 401(k)s into a single IRA tailored to their objectives, and strategically invested their excess cash into the IIM Moderate Portfolio for a more balanced approach.


Our goal was to transform financial anxiety into a state of calm control, providing clear value assessments and investment strategies for existing assets while optimizing the client's cash reserves.


The results were transformative: the client's total investment portfolio's expected return improved from 4% to 7%. We established automatic contributions amassing over $60k per year, enhancing their savings strategy. Most notably, the client's confidence in their financial plan surged, with the Monte Carlo Probability of Success Meter indicating an increase from 1% to an impressive 89% probability of achieving their retirement objectives. This robust analytical tool uses a Brute Force Monte Carlo© technique, projecting the client's plan success across a multitude of simulations, underscoring the impact of strategic planning and optimized investment management.



Fee Structure


We have a clear and client-centric fee structure, designed to align the interests of all parties involved. We apply an annual fee of 0.75% on managed assets, billed quarterly with available breakpoints on asset levels above $3 million. This translates to $18.75 per quarter for every $10,000 managed. Importantly, all reported returns are net of all fees, ensuring clients receive a transparent account of the true value we provide.


Our fee rate is lower than the industry average of 1% as reported by Kitces. This competitive pricing is made possible through our strategic use of technology, which streamlines administrative tasks and boosts overall efficiency. This tech-forward approach frees up more resources for client-centered services, such as personalized portfolio management and thorough financial planning.


The fee covers all the services we offer, reaffirming our commitment to delivering top-tier financial advice without hidden costs. Clients at IIM benefit from a comprehensive service package that focuses on their financial prosperity and personal goals, all within a fee structure that highlights our commitment to both value and transparency.


Synergy of Technology and Personalized Service at IIM


We champion a harmonious blend of cutting-edge technology and individualized service. Technology is integral to our approach, enhancing our investment strategies through sophisticated market analysis tools, innovative portfolio design, meticulous risk management, and ongoing portfolio surveillance. Clients benefit from the convenience of commission-free trades, optimized trade execution, and an intuitive app for effortless account tracking and managing cash flows.


Equally important is our belief that technology does not supplant the essential human aspect of investment management but rather enriches it. Our skilled advisors offer a depth of empathy, understanding, and financial acumen, delivering services that are custom-tailored to meet each client's distinct financial goals and dreams. This fusion of technological efficiency with a personal approach ensures a comprehensive, considerate, and client-focused investment experience.


By seamlessly integrating the analytical strengths of technology with the nuanced insights of human expertise, IIM positions itself at the vanguard of contemporary investment management. We provide our clients with an optimal blend of the digital and the personal, encapsulating the essence of modern financial advisory services.


Portfolio Review


We invite you to see the IIM difference for yourself. Schedule a complimentary portfolio review with us today, where we’ll provide a thorough assessment of your current investments and demonstrate how our strategic approach can be tailored to your unique financial goals. Whether you’re seeking to grow your assets, preserve your wealth, or plan for future milestones, our team is here to guide you every step of the way.


Let us help you navigate the complexities of the market with confidence and clarity. Reach out to us to arrange your free portfolio review and embark on a journey to financial well-being with Intent Investment Management as your trusted advisor.


Contact

JUSTIN WOLLMAN

PRINCIPAL | INVESTMENT ADVISOR

575 Market St, 4th Fl, San Francisco, CA 94105

Tel: (415) 717-2661 | Fax: (415) 480-8227


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