Capital Management offers a rigorous, active discipline through Interlake
Alpha, and a strategic, tax-efficient discipline through Interlake
Allocation. Interlake has designed these programs to complement one
another, but each can be highly effective as a stand-alone solution.
Interlake Alpha Portfolios
Interlake Allocation Portfolios
Interlake Alpha Portfolio
If you look at a chart of the S&P 500 index since mid-1999, you’ll
see that the broad U.S. stock market has made essentially no progress
in eight years. If the averages continue this plateau-like pattern
for the foreseeable future (as we think they will), and if market
returns alone cannot meet investors’ needs and expectations,
active management will be an indispensable part of a complete investment
Given the serious limitations of conventional approaches
to active management, and because we believe investors should know
getting and get what they pay for, Interlake offers a distinctive “true
Suffering from asset bloat, excessive diversification, style constraints,
lack of agility, and high expenses, most mutual funds have little
chance of outperforming their benchmark indices. To generate excess
return (or “alpha”) on a consistent basis, skilled money
managers must assemble concentrated, eclectic portfolios featuring
their best investment ideas.
That’s exactly what the Interlake Alpha Portfolio delivers.
With 12 to 20 positions (in most market environments) and an absolute-return
orientation, Interlake’s Alpha discipline can help investors
realize their financial objectives in spite of stiff headwinds for
the broad market averages.
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Interlake Allocation Portfolios
Grounded in Nobel Prize-winning research, the Interlake Allocation
Portfolios offer inexpensive, tax-efficient, exposure to a full range
of global asset classes. This discipline has three primary components:
(1) The management of overall risk through the weighting of asset
classes; (2) the selection of optimal exchange-traded funds; and
(3) Interlake’s Intelligent
Rebalancing system to keep each
portfolio in equilibrium.
In addition to their outstanding design and implementation, our
Allocation Portfolios do something very, very important: They protect
you against fear and greed. When a roaring bull market tempts euphoric
investors to chase momentum in a single asset class, or when a nasty
bear market coaxes them to simply bail out in despair, emotional
decision-making can inflict permanent damage on portfolio returns.
By helping investors participate intelligently in more than a dozen
major asset classes, the Interlake Allocation program offers an institutional-caliber
complement to our Alpha discipline.
A short note on Exchange-Traded Funds: The category is expanding
rapidly, and, as usual when there’s money to be made in a product
line, many new ETFs leave much to be desired: too specialized, too
expensive, too trendy, and too late. But there’s also some
intelligent innovation amid all the excess, and we monitor new entrants
to the ETF marketplace in order to position our clients on the sensible
middle ground between the cutting-edge and the tried-and-true.
Interlake offers Allocation Portfolios in five categories: Aggressive
Growth, Growth, Growth and Income, Income, and Capital Preservation.
Interlake’s Intelligent Rebalancing Process
Interlake rebalances clients’ Allocation Portfolios intelligently,
when position weights exceed pre-established tolerance levels, not
arbitrarily with the passage of time. To understand the benefits
of the Interlake rebalancing program, consider the shortcomings of
the calendar-driven alternative.
- Calendar-driven rebalancing is fundamentally illogical.
The inescapable problem with calendar rebalancing is that it’s
unrelated to actual developments in the capital markets. Many financial
journalists and professionals recommend annual rebalancing in order
to minimize the role of emotion. That’s a sensible objective,
as emotional decision-making tends to impair returns. But why should
investors replace one set of faulty practices (assuming too much
risk by chasing momentum, or too little by capitulating in bear markets)
with another (calendar rebalancing)? The answer, of course, is that
they shouldn’t. Fortunately, Interlake
offers a smart, pragmatic alternative. By establishing and
enforcing tolerance levels for departures from benchmark portfolio
weights, Interlake keeps client assets in equilibrium between unnecessary
and unhelpful rebalancing on the one hand and portfolio drift on
- Calendar-driven rebalancing can produce unnecessary tax liabilities. When not linked to
a careful program of tax-loss harvesting, calendar rebalancing
can create unwanted tax implications. As part of our rebalancing
program, Interlake can help clients avoid
unnecessary tax bills and maintain exposure to key asset classes. Paying taxes is fine
as long as tax liabilities are incurred for good reason. The point
of Intelligent Rebalancing is not to avoid taxes at all costs,
but to ensure that the benefits of any portfolio changes justify
whatever tax implications those changes create.
- Calendar-driven rebalancing can impair returns. By limiting the
contributions of high-performing asset classes, calendar-driven
rebalancing may not allow winning positions to boost overall portfolio
returns. The single most compelling reason to diversify across
asset classes is that no one knows—and
no one should pretend to know—which asset classes will outperform
in the near future. By participating in multiple asset classes
in a risk-appropriate way, investors can ensure that they will
benefit from outperformance wherever it materializes. But if last
underperformer may be this year’s outperformer, last year’s
outperformer just might outperform again! In the face of so much
uncertainty, Interlake operates on the middle ground between
mindlessly trimming winning positions every year and simply letting
the market distort portfolio positions and bring those positions
back into balance the hard way—through nasty corrections.
- Calendar-driven rebalancing can generate excessive trading. In some corners of the financial
services marketplace one can find recommendations that investors
rebalance as often as quarterly. That’s just silly. Recommendations
of semiannual or annual rebalancing are more common and more reasonable,
but still not optimal. As with tax liabilities, investors should
incur commissions and create taxable events only when the benefits
of trading justify those costs. Unlike calendar-driven rebalancing,
Interlake’s intelligent approach begins with a calculation
of the likely benefits of risk reduction, return enhancement, and
tax management. With a sense of potential advantages in hand, the
cost-benefit analysis of rebalancing activity is straightforward.
The objective of Interlake’s Intelligent Rebalancing program
is to manage risk and, in the long run, enhance return by selling
a marginal portion of a given asset class when it’s priced
relatively high and buying a little more when it’s priced relatively
low. The logic is straightforward, but implementation can be challenging
in both technical and emotional terms. Interlake’s intelligent
approach to rebalancing provides an excellent mix of risk- and tax-management.
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