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Heritage Trust Investment Process Starts with the Client

John McCollum, CFA, led the team that developed the investment process Heritage John McCollumTrust uses today. In the interview with John below, who now serves as Senior Vice President-Investments with Argent Financial Group, we find out the nuts and bolts behind the Heritage Trust process and how our clients benefit from it.

Why is it necessary to have an investment process?
All investment firms have philosophies that guide their approach to managing portfolios. These core beliefs underpin our entire investment process. The process is i05n place to guide the management of portfolios during normal times but importantly, can also serve to protect portfolios from the human emotions that come with times of euphoria and stress. The process serves as a constitution of sorts.

How was the process developed?
The investment process at Heritage Trust was developed over years of study, observation, and reflection and resulted in an approach to managing investment portfolios that struck the proper balance between the art and science of investing. We set out to develop an approach to portfolio construction that took the best parts of Modern Portfolio Theory, the well accepted idea that diversification reduces risk, and blended it with a system of in-house asset class and security valuation, a focus on the minimization of fees and taxes, a recognition that it is difficult to outperform in many asset classes and finally the use of a dedicated portfolio manager to interpret the individual risk and return needs for each account. The result is customized portfolios that mitigate risk while enhancing return.

What are the strengths of the process that continue to make it work for Heritage Trust today?
Like the Constitution, the policies that underlie the Heritage Trust investment process should stand the test of time. Market conditions change. Valuations change. Expectations for growth, inflation, and productivity change. One’s overall approach to investment management must be adaptable to changing market conditions. The approach remains the same, even if the outcomes or the people involved in the process change. I think it is that aspect of the Heritage Trust approach that makes it so valuable to Heritage clients. It does not rely on the opinions or forecasts of one person. It has been embedded in the organizational approach to managing investments.

How do Heritage Trust clients benefit from the process?
The values of Heritage Trust are rooted in our fiduciary duty to always act in the best interest of clients, and our investment process was developed around that. We understood that excessive, and in many cases unnecessary, fees harmed investor’s long-term returns. We also understood that unnecessary trading and frequent portfolio adjustments mostly detracts from long term results. As a result, the established investment process provides a customized portfolio based on the individual’s needs, time horizon and risk tolerance while minimizing fees for the best possible net return.

John, you’ve been involved with Heritage Trust since 2000 and you’re now a leader in our sister company Argent Financial. What is one aspect of Heritage Trust that has kept you involved?
I most appreciate the people and the way clients are valued at Heritage Trust. The team at Heritage genuinely puts client interests first. I think the Heritage Trust investment process is driven by the motivation to do the right thing for clients’ long-term investment performance even if it means not doing the popular thing.

Learn more about John’s new role with Argent Financial Group here. 

INVESTMENT OUTLOOK – Fourth Quarter 2015 Heritage Market Brief

SECURITY SELECTION COMMITTEE VIEWPOINTS

Fourth Quarter 2015

THEMES

  • Despite a 5.1% unemployment rate and second quarter GDP revision up to 3.9%, the Federal Reserve did not raise interest rates on September 17th as the committee feared higher U.S. interest rates would further strengthen the U.S. dollar and cause further weakness among emerging markets
  • During the third quarter, the market experienced its first correction in four years upon heightened concerns surrounding China’s slower expected economic growth, the strong U.S. dollar, weak oil prices, and reduced capital spending in response to the former
  • While corporate credit spreads have increased over the last 6 months, the current default rate of 2.3% remains relatively low compared to the historic default rate of 4.5%; therefore, we currently view this as an opportunity to buy corporate debt where necessary and appropriate rather than viewing it as an economic health warning
  • U.S. auto sales soared 16% in September and are on track to reach a 10-year annualized high of 18.17 million units
  • Housing remains strong with new home sales at the highest level since February 2008
  • U.S. consumers remain healthy as signaled by a 3.2% year-over-year increase in disposable income
  • With September nonfarm payroll additions of only 142,000 relative to an expected 200,000, continued global growth uncertainty, and inflation levels below 2% with no sign of increasing as indicated by TIPs and commodity prices, it is very likely the Fed will postpone its first rate hike until 2016
  • While interest rates remain range bound, individual bonds held to maturity should continue to provide downside protection
  • It is likely that volatility will continue as long as the market remains concerned about the timing of rate hikes and global economic health
  • Emerging market economies remain at risk to rising U.S. interest rates; however, the asset class should be additive to long-term returns as demographics are favorable and the sub- asset class remains attractively valued at just 10.7 times next year’s estimated earnings.
  • Structural unemployment as well as a slow recovery from a severe recession may be playing a key part in the lowest labor force participation rate in 37 years.

ASSET ALLOCATION

We expect the central bank to remain committed to an accommodative monetary policy which should keep current yields low relative to historical levels. Thus, we believe an overweight in stocks relative to bonds is appropriate from a risk/return perspective. Our focus on valuations has led us to believe that U.S. small-cap stocks are rich relative to historical long-term averages. Therefore, we have taken the opportunity to trim from U.S. small-cap equities in order to lock-in gains and increase our exposure in asset classes that are more attractively valued. Despite weaker growth outside the U.S., we remain disciplined and maintain a strategic allocation to foreign markets, especially emerging markets where valuations appear much more attractive. Foreign small-cap stocks should be additive to the portfolio return in the long-run as small-cap companies tend to enjoy higher earnings and cash-flow growth relative to large-cap companies.

Since, much of our small-cap exposure is in European small-cap companies, European accommodative policy should prove to be beneficial in the long-run as well. While our fixed income exposure remains underweight due to the current risk/return profile, we continue to purchase individual fixed income securities as bonds play a vital role in the portfolio.

We believe alternative exposure remains vital to portfolio diversification. While we maintain a position in U.S. REITs, we have taken the opportunity to trim where necessary due to our belief that the asset class has potentially reached overvalued territory after outstanding growth throughout the recovery. Additionally, we continue to hold our strategic weight in commodities despite recent lackluster performance. We believe that the long-run inflation hedge as well as diversification benefits will be well rewarded in time.

These views represent the opinion of the Security Selection Committee which are based on qualitative as well as quantitative factors. These quantitative factors are primarily driven by valuation research which then forms our subjective assessment of the relative attractiveness of asset classes and subclasses over a 3- to 5-year time horizon.

Click on here to view the PDF version. 

Heritage Book Review: THE OPPOSITE OF SPOILED

by Kenny Brown, Heritage Trust

October Book of the Month: The Opposite of Spoiled by Ron Lieber51pk7D-zV3L._SX331_BO1,204,203,200_

My wife, Erin, and I recently traveled to Denver, Colorado and visited a popular candy store downtown. Anyone who knows me knows how much I love candy and my inability to discipline myself, either when purchasing or consuming it. I paid for my lack of self-control later that evening when I consumed almost a pound of gummy bears. Why do we, even as adults, continue to make poor decisions when we know the consequences of our actions? My initial thought when we entered the candy store was “I am on vacation, I can spoil myself as I worked hard this week and I deserve it!” Unfortunately, for many of us it is this same attitude we have about our money. We make poor financial decisions, because we work so hard and the thought of having to wait to make that purchase makes it almost impossible. It wasn’t until I had read The Opposite of Spoiled by Ron Lieber did I realize my behavior as an adult was a reflection of the habits I developed as a child. The good news is that inside Ron’s book are great ideas and suggestions from other parents that can help to establish and reinforce the behaviors that can create long-term financial success for generations to come.

According to the author, “The Opposite of Spoiled is a generational manifesto first and foremost—a promise to our kids that we will make them better at managing money than we are and give them the tools they need to avoid the financial traps that still ensnare so many adults.” So, I have to fully disclose: I don’t have kids, which is sort of ironic that I would be reading such a book. But here is the thing: I really want kids. My role as a relationship manager at Heritage Trust and as a future parent led me to this book, and I knew I had to read it!

  • The first part of the book does a great job of breaking down and analyzing why it is so difficult to even talk about money especially with our kids. The biggest take-away from reading this book was the reality that if I remained silent on the issue of money when I have my own kids, that someone else “wouldn’t” be. Now I feel much more prepared to answer questions about money and handle decisions regarding giving an allowance or teaching them to be disciplined and comfortable with delayed gratification.
  • Overall, I highly recommend the book even if your children are already grown and you want to learn more about it yourself. I think it gives great insight in a practical sense of our own biases and views on money – especially the final chapter when the author ask the readers, “How much is enough?” I love the author’s final plea as not to overemphasize the topic of money, “So over the 20 years or so that our children live with us, we should try to have just enough conversations about money and the values behind our financial decisions. Only then will they have a complete picture of where we stand, what we stand for, and how we make financial decisions.”

As one who may be a parent in the not too distant future, I really appreciate the author’s decision to do this project and incorporate so many great ideas from others who have had to learn the hard way. Get the book here or your favorite book retailer.

Reviving a Legacy

by Bond Payne, Heritage Wealth Management Company

Bond PayneSometime in the early 1920s, the Masonic Lodges of Oklahoma City decided that they needed a place to gather that was large enough to accommodate their members from across the City. So they commissioned Solomon Layton, the premier architect of his day and architect for such landmarks as the State Capitol, Skirvin Hotel and Mid-Continent Life Building, to design a monumental building that included a 2,000 seat auditorium. No one could have envisioned that this stately landmark perched atop a hill on the northern edge of downtown would become one of the most important buildings in the city, as a result of its architectural, historical, cultural and spiritual significance.

In 1995 the building, which became the Journal Record Building, sustained heavy damage in the Oklahoma City bombing. Many occupants were injured, some severely, and the building was rendered uninhabitable. It was soon purchased by the City of Oklahoma City using federal disaster funds, and a major effort was undertaken to save the structure. The Oklahoma City National Memorial Museum eventually occupied the west 1/3 of the building, became the principal symbol of our city’s perseverance and hope, and the steward of The Oklahoma Standard.

However, the majority of the building has remained largely vacant for the past 20 years and is the last visible wound of the bombing in our city’s core. So the past four years, Heritage has patiently and diligently pursued its vision to purchase and restore the Journal Record Building as a symbol of our commitment to our community and our expression of The Oklahoma Standard. This undertaking includes a restoration of the physical structure, but also a restoration of the scars on our urban landscape and feelings of loss that the empty building symbolizes. In our mind, we are restoring a building, a neighborhood and a community.JRB Aerial Final

As you have probably read in the newspapers, we successfully closed on the acquisition of the building recently, and I want our clients and professional partners to understand why we are undertaking this project and how it supports a culture of stewardship, quality and pioneering. Please call me for a tour of the building so we can discuss how this and other events at Heritage will help serve your family for generations to come.