Prosper and Protect
We understand markets aren’t linear, they move in cycles, in fact more often than not, they move in relationship with macroeconomic and credit cycles. Additionally, they routinely trend in three distinct patterns. They are either rising, moving sideways, or descending. Applying a macro or broader view helps us understand if markets are currently over or undervalued relative to their long term average. Because everything including asset prices “mean reverts” (moves to its historical average), understanding where market indices are relative to their long term average in the investment cycle is crucial. Our risk management process incorporates the changing macro-economic conditions and integrates intermediate asset trends while respecting where the markets are in the investment and credit cycles. That may sound complicated, but don’t let the technical jargon intimidate you. The process is actually quite straight forward.
Our strategy allows us to adjust assets within the portfolio to take advantage of new opportunities as market trends change. We use a disciplined investment process to tactically allocate your portfolios based on risk, supply, and demand. This allows us to create portfolios designed to offer more focused diversification and risk management than traditional “buy and hold” asset allocation strategies.
Asset classes can be ranked similar to the way one might rank sports teams; teams get ranked based on how well they perform against their opponents. The more games, matches or races won, the higher in ranking the team will go. The same process can be done with investment asset classes. The ranking process allows us to focus on the top trending investment sectors, including cash, and overweight those areas of the market exhibiting strength. This approach provides a systematic and disciplined way of overweighting asset classes when they are trending and provides a way of putting cash holdings, such as money markets, into the mix when the risk-reward cycle is no longer favorable.
We find the typical “buy and hold” approach restricts a manager from improving a portfolio’s performance as market trends and opportunities arise. Some buy-and-hold strategists rebalance their portfolios quarterly or even annually but traditionally remain in the same asset classes regardless of the cycle. Our process is more flexible. We adjust asset exposure more tactically, especially when market risk becomes excessive. When cycles change and risk is no longer being rewarded, we will increase cash, or hedge to protect your assets. We understand it is virtually impossible to capture the actual top and bottoms of markets. Tops and bottoms are actually processes not dates. For us, asset preservation is just as important as asset growth! Our focus is on major asset classes, with additional asset class exposure that may include sector-specific, commodity, and currency asset classes. The allocations adjust based on risk trends in the marketplace. Our decisions are made by utilizing research and evaluation techniques that attempt to evaluate the supply and demand forces of particular asset classes. We review each class from strongest to weakest, based on its relative strength. More about that in our Technical analysis section.
Investment Selection
The core strategy emphasizes concentrated exposure to a wide variety of asset classes (like stocks and bonds), regions, countries, industries, sectors and alternatives. Each investment strategy can contain numerous securities within themselves. For example, one strategy could focus on the financial industry and contain multiple bank and financial related stocks. As a result, it can offer exposure to a particular asset class with less risk than investing in a single or a handful of individual securities.
Individual stocks are used for our clients that seek more advanced growth strategies. Stocks are typically more volatile than broad market and sector based indexes, due to their individual company risk and lack of diversification. However, we do use our risk management process in our stock strategies that limit concentrated exposure to help prevent potential large losses.
Passive strategies are also used in limited situations. When specific sector exposure is not adequately covered by other options, we utilize a small select group of passive investments that are followed on a daily basis. We can still track the demand of these positions just like other securities we utilize. Additionally, since they are not actively managed they are often competitively priced. However, in specific macro environments, select active strategies may be employed to provide alternative coverage not offered by other options.
In addition to daily liquidity, our “prosper and protect” process seeks to utilize cost efficient investment vehicles where supply and demand risk can be quantified and measured.
Investment Ideology
Macro Cycle investing prioritizes intermediate trends within the full investment cycle. Unfortunately, when the tide goes out, all boats tend to go out with the sea. Traditionally, portfolio managers use static asset classes and make incremental changes based on market performance. These “buy and hold” portfolios use indexes that are weighted often by price and therefore are past performance dependent. What has gone up the most in the past receives the highest weighting. We consider this driving by looking in the rear view mirror. Our process follows a different path. We review primary and sector asset class trends and measure both their relative strength, supply, and demand to better see where the puck is going, to use the Wayne Gretzky analogy. We focus on intermediate-term time frames since often short-term measures are too volatile and long-term measures are more difficult to predict.
Technical analysis uses relative strength to closely monitor trends within the markets. Relative strength compares a security’s performance to the overall market, and helps identify the ones that are outperforming the overall market. The “overall market” depends on the asset class the portfolio manager is analyzing. For example, if the manager is analyzing US stocks, he or she would compare the performance of each domestic stock against a US stock index, like the S&P 500, and potentially buy those that are outperforming the index. Sticking with the sports analogy, this is like comparing each hitter’s batting average against the league average. Cycle awareness combined with the relative strength, supply, and demand for the market or a specific sector in the intermediate term serves as the primary influence in our dynamic asset allocation process.
Risk management is the most important feature of our investing approach. We like to say that market cycles take the stairs up and the elevator down. We just don’t want to be on that elevator. Since we focus primarily on intermediate sector demand, we can adjust to changing market internals optimally before too much damage is done in a market correction. Traditional buy and hold asset allocation strategies stay invested regardless of how the markets are trending, even in a bear market.
We seek investment sectors that exhibit strong demand regardless of where we are in the investment cycle. There will be times the risk-reward of almost all asset classes is too high to be positioned. Everything could be going out to sea. In these environments, we go to cash and extreme low volatility assets to preserve our client’s hard-earned wealth. Once again, we believe protecting your assets is just as important as growing them!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including the loss of principal.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Asset allocation does not ensure a profit or protect against a loss.
Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.