A Word From The Advisor
A Managed Approach to a Targeted Focus

At Oakwood, we believe the definition of a successful investor is someone who captures expected return with the least amount of risk. As your advisor, it is our responsibility not only to fully understand your risk and return preferences, but to develop an optimal investment asset allocation, and then invest in those investment vehicles which we believe would accurately and consistently reduce risk and provide higher expected returns.

As an investor, there is always that temptation of “doing it yourself.” It seems that with the wide range of trading options, information, and technology available, it is a matter of picking up a phone or a mouse, and making the trade. Many “do-it-yourselfers”, overwhelmed with the wide range of offerings available, end up choosing an index fund or an exchange-traded fund, without fully understanding the underlying risk of such an investment. But the most successful investor always evaluates the risk they are taking in relation to their expected returns.

It is widely accepted that asset allocation is a major determinant of portfolio performance. Our ongoing role as a trusted advisor encompasses the following in regards to asset allocation:

• Analyze your risk/return profile.
  
• Determine the most appropriate asset classes for your personal investment goals.
• Research the optimal investments for each asset class.
• Structure your portfolio with the appropriate weights.
• Invest your portfolio in the most cost effective manner possible.
• Monitor and manage each investment and asset class, and make adjustments when necessary.

The best way for us to ensure that you receive the optimal portfolio risk and return characteristics is to utilize investment vehicles that accurately and consistently target the asset classes that we have identified as being the most appropriate for you, and the most rewarding over time. Oakwood Capital Management’s alliance with Dimensional Fund Advisors (DFA), through its institutional funds exclusively available through registered investment advisors such as Oakwood, has enriched our ability to manage and deliver the accuracy and consistency that is crucial in building your customized portfolio. The Oakwood/DFA structured approach may seem to some investors like passive management, or “indexing”, but, in fact, it is far from that.

The first difference between the two is the structural benefit of Oakwood structured and managed portfolios. The following table shows a side by side comparison of a simple portfolio characteristic, weighted average market capitalization, which defines size, between three widely used indices, and the Oakwood structured and managed portfolios.

As you can see above, the Oakwood structured and managed portfolios’ weighted average market capitalization is much lower, illustrating the targeted focus on smaller companies, which have generated historically higher expected returns. Taking it a step further, and examining another simple portfolio characteristic, the book-to-market ratio, shows another fundamental improvement of the Oakwood structured and managed portfolios in targeting value stocks. Research for the past eighty years has shown that a higher book to market ratio has provided higher expected returns.

Oakwood’s portfolio construction method also begins with a wider net, by starting with entire markets, not just subsets of markets. In a traditional index fund, the fund manager seeks to replicate the performance of JUST the stocks in that index. Our portfolios are not dependent upon the stocks in the indices but rather designed to pinpoint the targeted risk factors, size and value, which history has shown provide higher expected returns. These characteristics are evident in the above graphs.

Another difference between traditional indexing and Oakwood’s designed portfolios is the trading benefit. The Oakwood/DFA approach allows for more flexible and patient trading because it is not restricted by the goal of forced reconstitution and tracking error minimization, which is the difference between the performance of the benchmark and the indexed portfolio. Traditional index fund managers are forced to reconstitute, which has proven to be a costly objective. When a stock migrates into the buy or sell range of one of our strategies, we have the option to buy or sell. Index fund managers are forced to replicate their respective indices, and have no option to buy or sell; it is mandatory. Traders know in advance which stocks are being added to or deleted from the index and often front run changes to the index, the result of which is that index fund managers are forced to buy high and sell low, to the detriment of index fund investors. For Oakwood/DFA, the decision about a security’s weighting is made based on the price of execution, and is not based on the mandate of an index. If we can buy a large block of stocks below market price, avoiding the often damaging impact of bid and ask spreads in less liquid areas of the market, we are willing to take positions larger than the exact market cap weighting to capture the discounted price. We favor price over the timing of a trade execution.

Structure drives performance. The best way to ensure that you actually receive the returns of the asset allocation we’ve designed for you is to implement your investment program with portfolios that we believe will deliver precise risk factor exposures. The ability to use more flexible and patient trading than is customary of traditional index fund managers allows us to achieve this objective in a more cost-effective manner.

We welcome the opportunity to further discuss how Oakwood structured and managed portfolios can improve your investment performance, or any other investment matter. Please give us a call at 1-800-586-0600.