Johnston Investment Counsel's index plus investment strategy is designed to outperform a broad market index (such as the Russell 3000) using a process known as style rotation. This strategy is implemented by using low-cost and tax-efficient style-based index funds that are designed to replicate the return and risk characteristics of style-based indices. You may receive either a summary or contact us for a more detailed presentation of Johnston Investment Counsel's index plus services.

• How does Johnston Investment Counsel make style allocation decisions?
• Why Use Index Funds Instead of Active Managers?
• Does Style Rotation Work?
• Advantages to Johnston Investment Counsel's Index Plus Investment Strategy

Investment styles consist of securities that exhibit similar fundamental characteristics. For example, investment styles may consist of different:

• Company size ranges (large, mid, small)
  
• Investment approaches (value, core, growth), and/or
  
• Nationalities (U.S., developed international, emerging market)
  (See a graph of equity investment styles.)

Bond investment styles consist of nationality, quality (investment grade versus non-investment grade, and maturity (short, intermediate, and long). See a graph of bond investment styles.

Research and historical experience has shown that investment style segments tend to have different returns at different points in an economic cycle (large stocks outperform small stocks, for example). These return differences may be very significant and can last for several years. Both stocks and bonds have exhibited significant performance differences between investment styles.

How Does JIC Make Style Allocation Decisions?

In making style allocation decisions, whether they are for stocks or bonds, JIC follows a similar process:

1. Determine the fundamental attractiveness of the investment style.
2. Examine the technical characteristics.
3. Evaluate how current macroeconomic factors may influence future return differences.
4. Determine the magnitude of the style "tilt"

Why Use Index Funds Instead of Active Managers?

Index funds are low-cost and tax efficient. In addition, index funds have, in most investment style categories (but not all), consistently outperformed the median active manager on an after-fee basis. While index funds will rarely be the "best performing" fund, they generally provide consistent above-median performance. See an example of index funds performance consistency.

Does Style Rotation Work?

The short answer is yes. During rolling 3-year periods, JIC's model style rotation portfolio has consistently outperformed an index consisting of 85% Wilshire 5000 / 15% Eafe. See an example of the historical model excess return.

Remember, past style-return differences do not necessarily imply future style-return differences. However, while the magnitude of the style-return difference may change, we believe there will continue to be return differences between investment styles.

Advantages to JIC's Index Plus Investment Strategy Include:

• Outperformance potential,
  
• Broad portfolio diversification,
  
• An extremely low-cost investment strategy,
  
• Tax advantages associated with low turnover index funds, and
• Elimination of active manager underperformance.

 

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