Every time you open a CD, buy a stock, or add to a mutual fund account, that’s investment management. Simply stated, “professional” investment management is done by a person or organization on behalf of someone else. Investment management involves two basic steps:
- Asset allocation – Determining how to distribute your assets over various investment types [e.g. money markets, bonds, stocks, etc.] based on your risk tolerance, goals and need
- Security selection – the identification of specific bonds, stocks or mutual funds most suitable for each selected asset class
Risk tolerance is your “comfort level” with different types of investments or different levels of risk in an investment portfolio.
We seek to understand your personal goals and objectives by asking you to complete an Investment Questionnaire. It contains questions about your physical health and needs; your financial circumstances and goals; payments or withdrawals you may expect from your account; your attitude toward different types of securities and the risks that accompany them; and finally the type of investments you currently hold. We then create an investment plan to respond to your individual circumstances.
Cost basis is how much you paid for a stock, bond, mutual fund, etc. It is very important to know the cost basis of every asset and be able to document it. The difference between what you paid for a security [its cost basis] and its current value is capital gain or loss. If the difference is a gain, you may be taxed when the security is sold. We cannot assign an unsubstantiated cost basis to a security you transfer into your account. If cost basis cannot be substantiated, we will carry it on our books at a total cost of $1.00. This would make the entire value subject to capital gains tax at sale, so it is in your best interest to do all you can to determine the accurate cost basis of all your assets.
Once we review your completed Covenant Trust Investment Questionnaire, we determine the investment objective that best suits your needs and goals. Investment objectives range from very conservative, income-only accounts to growth-oriented accounts that offer the potential of superior, long-term returns. The classification of your account within this range is determined by balancing your investment objectives against the level of risk you can tolerate comfortably. Covenant Trust has eight basic investment objectives:
- Capital Preservation
- Income with Growth
- Conservative Growth
- Moderate Growth
- Focused Growth
- Strategic Growth
- Aggressive Growth
- Capital Appreciation
The old saying is certainly true: The greater the risk, the greater the possible reward [or loss]. The greater the total return [income plus growth] you seek, the greater the risks you must take to get there. Compensated risk provides a corresponding increase in potential reward. Uncompensated risk does not enhance a portfolio’s return expectation. Covenant Trust’s goal is to reduce or eliminate uncompensated risk through portfolio diversification. Our challenge is to properly match the risk that you can and should take—given your circumstances—with the appropriate investment mix.
After we assess your risk tolerance and determine your investment objective, we assign an asset allocation formula—specific percentages to be invested in cash, fixed-income, equities, or other assets—for your account. You receive an initial portfolio review with Covenant Trust’s recommendations for an investment strategy that puts your long-term investment goals into action. We share this plan with you to ensure that we understand your wishes and expectations at the outset, and ask you to update the information periodically to keep us aware of your changing needs.
Covenant Trust has one basic investment strategy which addresses needs for both income and growth. Conservative, income-oriented investments provide the foundation and often the largest portion of the portfolio. Covenant Trust believes the best way to invest this portion of your account is in bonds, through diversified investment grade bond mutual funds with short- to intermediate-term laddered [tiered] maturities. We do not buy long-term bonds or funds because of their excessive price volatility.
When invested for longer terms, stocks have historically experienced higher returns than bonds. For this reason as well as for additional diversification, we allocate a percentage of most portfolios to equity securities. As with fixed-income, Covenant Trust believes the best way to invest the equity portion of your account is through mutual funds. So we have one basic investment strategy, customized for each account by altering the mix of assets based on your individual goals and needs.
Yes. Because Covenant Trust has specific investment policies and strategies, the assets you have when your account is established may not be ideally suited to the goals of the investment plan Covenant Trust develops for your account. If so, we will recommend replacing these assets with core holdings that Covenant Trust monitors regularly. This doesn’t mean your assets are of poor quality but rather may not fit the strategy Covenant Trust uses. In addition, some clients’ portfolios lack proper diversification because they have individual holdings that are disproportionately large. These holdings usually create some of the unnecessary risk noted above. To maximize the benefits of Covenant Trust’s investment program, it is important for us to bring your account into conformity with our investment strategy as soon as practical.
Covenant Trust uses multiple investment managers through the use of no-load mutual funds. These managers may utilize active or passive (index) strategies. An important part of Covenant Trust’s ongoing investment management is the monitoring of these managers in terms of adherence to stated objectives, risk, and investment performance.
Before Covenant Trust buys tax-exempt bonds or funds for an account, we review the client’s projected marginal income tax rate as well as the present yield differential between tax-exempt and taxable alternatives. Where there is an adequate yield advantage with exempts, they will be considered as an addition to the portfolio. We use the latest information you have given us about your federal and state income tax filings in making this determination.
The Investment Committee of the board meets at least quarterly to formulate and review investment policy, evaluate internal and external investment analysis, establish criteria for Covenant Trust core holdings, review asset allocation and holdings of selected individual accounts, and monitor the activities of the Portfolio Review Committee which reviews each fiduciary account at least once annually.
Covenant Trust seeks to achieve investment returns over time which meet or exceed the returns of stated benchmarks for each respective asset class while maintaining risk levels in line with those benchmarks. While it is impossible to predict investment returns, we believe our investment approach serves as a sound basis for achieving these goals. We provide clients with standardized total return data for their accounts on a quarterly basis so that they may monitor their performance directly.
You expect a lot from your asset manager:
- Expertise and knowledge
- Discipline and prudence
- Appropriate risk management
- Long-term focus
- Clarity and transparency
- Values in common with yours
- Commitment to your goals
Covenant Trust provides all of these. We follow a disciplined, prudent asset allocation strategy with appropriate risk management. Asset allocation is unique to each portfolio, based on your investment objective and your tolerance for investment risk. We rebalance regularly to maintain control of that risk. That means you can be confident we’re listening to you and investing to achieve your goals.
Covenant Trust is a strategic rather than a tactical investor. We seek to achieve long-term growth in your net worth. We stick to the strategy rather than react to events. We offer services, we don’t sell products. Our goal is your success in achieving your investment objectives.
Every trust and IRA receives this professional asset management as part of our trustee services. You can also take advantage of our asset management services with an Investment Management Agreement, available for both individuals and institutions.