Q - Coins

Q: What is CLS’s strategic methodology?

In short, we emphasize high quality stocks and bonds. High quality stocks are those companies that tend to have higher profitability, stronger balance sheets, and higher dividend growth. High quality bonds meanwhile, are essentially Treasury bonds, including Treasury Inflation-Protected Securities (TIPS).

Once the portfolio is established, we will not make changes based off our outlook, market valuations, or trends. It will be passively managed, which is a big change from how we have previously managed money at CLS. We will, however, rebalance the portfolio at least annually in order to ensure the asset allocations remain in line with their long-term targets.

We will have five strategic allocations, ranging from 100 percent to 20 percent equities.

Q:Why does the strategic methodology focus on high quality equities?

First, we wanted to introduce a passively managed strategy due to advisor demand. Many advisors we talked to liked many things about us, but their preference was for a passively managed portfolio, at least for the core of their holdings. Second, we wanted to build something that was different, both in looks and behavior, than other multi-asset portfolios, including CLS’s Risk Budget portfolios.

This led us to emphasize high quality securities. There have been multiple academic papers in recent years talking about how high quality equities tended to outperform over time, both in terms of total returns and risk-adjusted performance. And this was especially so in down markets.

In nearly all multi-asset portfolios, including at CLS, there is usually some degree of exposure to lower quality securities. While this should add to total returns over time, especially if they are tactically managed well, they do create different portfolio behavior than portfolios that just contain high quality securities.

While I believe in the power of multi-asset portfolios, and the ability to remain flexible, there is an appeal of passively managed high quality portfolios. They are dependable portfolios. They do tend to hold up better in down markets. They have lower costs. I get the appeal. Some advisors will really like these portfolios, either using them for their entire portfolio, or for the core of their holdings, supplementing them with more focused strategies such as CLS Active.

Q: What are high quality equities?

High quality equities tend to have:

  • Higher profitability
  • Relatively stable earnings
  • Stronger balance sheets
  • Higher dividend growth
  • High quality stocks tend to be large growth stocks

 Q: Why is now a good time to introduce a high quality strategic strategy (HQS)?

Advisors using HQS should hopefully be using it for the reasons stated earlier. They need to buy into the idea of the portfolio being passively managed and why they want to hold high quality securities.

That said, there are better times to buy high quality securities. High quality securities should do better when the economy and markets are choppy or start to sag. They should do better when economic growth slows. They should do better when interest rates rise. They will not, however, do better when the economy is emerging from recession or when the stock market is racing higher. Given these considerations, it’s probably a better time to buy HQS.



A client’s risk budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio.
Treasury Securities are securities issued by the U.S. Government.  Generally issued to fund its operations and backed by the full faith and credit of the U.S. Government, treasury securities are considered extremely low risk investments.  Treasuries may include: Treasury Bills (T-Bills), short-term debt instruments which mature one month to one year after issue; Treasury Notes, which mature at one to ten years after issue; Treasury Bonds (T-Bond), marketable, long-term fixed-interest debt instruments with a maturity over ten years; or Treasury Inflation Protected Securities (TIPS), long-term debt instruments that mature between five and twenty years and are indexed to inflation in order to shield investors from inflation risks.  The return on treasury investments is measured by the Treasury Yield.
High quality investments are investments made in companies and/or products with outstanding characteristics.  Although high quality investing attempts to eliminate as much risk as possible, risk is always inherent in any investment methodology.