Investment Philosophy Statement


The Bryan-Billauer-Kozo Wealth Management Group of Wells Fargo Advisors philosophy is based on the compilation of several academic and institutional investment management strategies. Portfolios are structured primarily for high-net-worth investors and institutions, and they incorporate the following techniques:

•  Dynamic Asset Allocation

•  Core-Satellite Portfolio Construction

•  Tax Efficiency

•  Systematic Rebalancing

Dynamic asset allocation

Asset allocation is the process of attempting to maximize port- folio objectives while minimizing the associated risks. In order to do this, the portfolio is invested in various asset classes such as equity, fixed income, alternative investments and cash or cash alternatives. The returns of these asset classes tend to be affected by different factors, and thus face different risks. Although asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns, it has historically helped to reduce the risk of a portfolio if implemented properly.

Traditional asset allocation uses a fixed ratio to distribute assets among various asset categories. The ratio is typically determined by the investor’s age, risk tolerance, or financial objectives. While this approach may reduce risk, it makes little attempt to adjust the distribution of assets to take advantage of market conditions and may leave significant portions of the portfolio vulnerable to market downturns, and conversely, not well positioned for market upswings. Dynamic asset allocation, like a “fixed asset allocation strategy,” seeks to reduce risk  through diversification among different asset categories. Though diversification does not guarantee profit or protect against loss in declining markets, dynamic asset allocation allows us to weight investments based on those categories that we deem to have the greatest potential for positive returns, given the current market conditions. The allocation of assets becomes dynamic when tactical changes are made in response to market conditions and perceived opportunities for profit or reduction of risk.

The asset allocation recommendations of Wells Fargo Investment Institute are used as a benchmark to help guide the asset allocation decision.

Core-Satellite portfolio construction

Once we have defined the asset allocation strategy to be implemented based on our client's investment needs, the next decision is how to fulfill each asset class. Our methodology involves using a Core-Satellite approach to represent each asset class. Core-Satellite portfolio construction is an institutional strategy that provides a framework for asset allocation which incorporates traditional fixed-income and equity-based securities (i.e. index funds, ETFs, passive mutual funds, etc.) known as the "Core" portion of the portfolio, with a percentage of selected individual securities in the fixed-income and equity-based side of the portfolio known as the "Satellite" portion in an attempt to achieve more consistent portfolio tracking to asset-class benchmarks than an all-active manager solution provides.

Index investments form the core components, and the active managers constitute the satellites. The core components are selected based on their ability to closely track the benchmark index. Satellites will be chosen based on their risk/reward characteristics, internal expenses, turnover and style. The percentage allocated between indexes and active managers will depend on the perceived inefficiencies within the asset class. 

Tax efficiency

We have two classes of accounts that we manage — Tax-Sensitive and Tax-Advantaged. With our Tax-Sensitive portfolios, we focus on our after-tax rate of return. We understand that the tax efficiency of a portfolio is especially important for taxable investment accounts owned by individuals and institutions operating at the highest marginal tax brackets. By dividing the after-tax (or tax-adjusted) returns by the pre-tax returns of a portfolio, tax efficiency is derived. The highest possible score would be 100 percent, which would apply to a portfolio that had no taxable distributions.

We seek to improve the tax efficiency of the portfolio using three different techniques:

•   Adding more to index investments that have historically paid very little in capital gains until sold

•   Evaluating the risk and reward potential against the potential tax inefficiency of an active manager before it is selected as a satellite

•   Seeking out tax-loss harvesting opportunities to realize losses that may help offset current or future gains

With our Tax-Advantaged portfolios, we assume that the investments are held within a qualified plan, foundation or other tax- deferred vehicle or have a large tax loss carry-forward to offset future realized gains. These portfolios are managed for total return without regard for the taxes that might be incurred. Wells Fargo Advisors is not a tax advisor. However, we will be glad to work with you, your accountant, tax advisor and/or lawyer to help you meet your financial goals.

Systematic rebalancing

Systematic rebalancing is essential to maintaining the consistency of an investment account’s returns and risk profile. Rebalancing starts with dynamic asset allocation (as stated above) and targeted percentages in each category. During scheduled intervals, the assets are rebalanced back to their tactical target percentages. This is accomplished by reducing the amount in asset classes that have exceeded their specified percentages and by adding to the asset classes that have dropped below their original designated percentages. The frequency of rebalancing in a given year depends on the type of account: Tax-Sensitive or Tax-Advantaged. A rebalancing strategy requires strict discipline. To rebalance, portions of the best performing asset classes are reallocated to the underperforming asset classes. Adding to an asset class when it becomes a comparatively smaller percentage of the portfolio, and selling some of the asset class when it becomes a disproportionately large percentage essentially forces the portfolio to sell high and buy low, one of the fundamental rules to making money in investments. In the long run, if a buy-and- hold strategy is pursued (no rebalancing), it can increase the volatility of a portfolio as investors ride asset classes up and down, never having the potential to harvest some of the gains at the high points. Rebalancing helps reduce portfolio volatility and maintain a more balanced, diversified portfolio. Without rebalancing, the best performing asset classes will gradually become a greater percentage of the total portfolio, thus changing the risk/reward profile. By rebalancing the port- folio on a consistent basis, periodically reviewing the satellites, and adjusting the allocation to account for market conditions, our clients can be assured not to move outside of their original tolerance for risk due to a change in the portfolio’s composition.

Ongoing review

We believe in ongoing and frequent client communication. In addition to monthly account statements, you will receive a personalized, comprehensive quarterly monitor. The monitor reviews asset allocation, highlights current and past account performance in light of stated guidelines, and supplies relevant benchmarks against which you may further measure performance. In addition, the quarterly monitor graphs your account’s risk adjusted return since inception. We will review investment performance at least annually to determine the continued feasibility for achieving your investment objectives and the appropriateness of your current portfolio for achieving those objectives.

Wells Fargo Advisors
As each Private Investment Management (PIM®) program account is individually managed, construction and ongoing management of portfolios may vary from those discussed in this Philosophy Statement. 

Past performance is not indicative of future results, and there is no assurance that any investment strategy will be successful.The return and principal value of stocks fluctuate with changes in market conditions.

Investments and investment strategies contained herein are provided for informational purposes only.

We need to review your individual situation before recommending appropriate strategies. All investing involves risk, including the possible loss of principal. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). The PIM program is not designed for excessively traded or inactive accounts and are not suitable for all investors.

Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services. The minimum account size for this program is $50,000.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

 CAR 0621-0151.