Investment Management
Managing your own investments can feel like a full-time job, and that’s because it is. One of the cornerstones of our practice is actively managing our clients' investments to ensure they are positioned for success. We take pride in anticipating challenges and working proactively to circumvent them.
Our Investment Philosophy
Stay Humble and Respect the Market
We believe capital markets, especially developed markets where information is readily available and competition is intense, are generally efficient over the long term. Larger, more liquid markets are typically more efficient and adjust to new information quickly, while smaller, less liquid markets may not. Regardless of the degree of efficiency, market prices communicate valuable information from market participants that should be considered carefully and humbly.
Be Aware of Behavioral Biases
Unlike traditional investment models, which assume investors always make perfectly logical and rational decisions based on all available information, behavioral finance recognizes that, as humans, we are prone to emotional biases and errors. Over shorter time frames, these biases can lead to overreactions in markets. Investors should be aware of these biases and how they may impact their behavior.
Know Where Your Returns are Coming From
Capital markets are designed to compensate investors for assuming a range of risks (premiums), from the risk of merely losing purchasing power to the risk of outright losses. Over the long term, higher-risk investments like large cap and small cap stocks are generally associated with higher returns (premiums), while low-risk securities like Treasury Bills typically have a lower associated return. However, the contribution of various premiums to realized returns can vary dramatically over time. Rather than simply assuming recent returns will continue, investors should understand the factors that drive returns and how they may behave at different points in the market cycle. This can help investors understand when one risk premium may be priced attractively relative to another.
Emphasize Lower Valuation Markets
Despite our emphasis on the long term, we are mindful that the price paid for an investment is inextricably linked to its eventual realized return. Our long-term views do not absolve us of the responsibility of evaluating the risk-to-reward of every asset before investing. We do this by comparing market prices to our best assessment of fair value. We believe lower valuation markets will outperform higher valuation markets over the long term.
Avoid Undercompensated Risks
Over the long term, we believe that risk drives return. Whether it is in the form of inflation, the term (duration), credit, equity, illiquidity, or some other factor or premium, incremental risks must be assumed to generate incremental returns. However, this relationship can get distorted by short-term market dynamics. Investors should seek to avoid risks that do not carry the appropriate level of potential return.
Diversify Risks, But Don’t Eliminate Them
It is impossible to predict which asset class will outperform in any given year. Today's winners are often yesterday’s losers and vice versa. Investors should always maintain some degree of diversification across asset classes, sectors, factors, investment styles, and individual managers. A diversified portfolio should spread out desired risk factors, smooth out returns, and allow the opportunity to rebalance out of what has performed well and into what may not have.
Consider Both Active and Passive Management
Investors should focus on building efficient portfolios that generally keep fees and taxes contained over the long term; however, naively investing in index funds, especially in less efficient or illiquid markets, can carry uncompensated risks. In markets where structural inefficiencies create the potential for excess returns, we believe investors should focus on net-of-fees returns and consider high-quality active managers.
Avoid Performance Chasing
Academic and practitioner research has consistently shown mean reversion of excess returns, especially for traditional equity managers over non-overlapping three and five-year periods. Manager performance ebbs and flows. To judge a manager’s skill, performance needs to be viewed relative to the risk taken over long periods of time and across varying market environments. If past short-term performance offers any insight into a manager’s future returns, it is a contrarian signal.
Manage Fees and Taxes Holistically
Investors often make decisions based on readily available and easily observable information without considering the net impact on the overall portfolio. We believe the most efficient approach is to view fees and taxes holistically and to optimize portfolios for after-tax, net-of-fees returns over a full market cycle.
Focus on What You Can Control – Your Process
There is no investment strategy or process that works all the time. The best strategy is the one you will implement consistently through the inevitable ups and downs of the market cycle. Build a process informed by historical evidence, ignore as much noise as possible, and stick to the plan.
