Build Portfolios Focused On Compensated Risk In Well- Functioning Markets
OUR INVESTMENT PHILOSOPHY IS GUIDED BY THE FACT THAT OVER THE LONG RUN, CAPITAL MARKETS WORK, WHICH IS THE BASIS FOR PORTFOLIO CONSTRUCTION AND MANAGEMENT.
In well-functioning markets, the buyer has the same information as the seller, new information comes randomly, and prices quickly reflect this new information.
Our investment philosophy is best summed up in the phrase “markets work”. Since markets are efficient, there is no extra reward afforded to investors who take the additional risk of attempting to beat the market. In fact, decades of studies show that few – if any – managers are able to outperform their benchmarks on anything approaching a consistent or repeatable basis. This effectively adds another layer of risk – manager selection risk – to the total risks that an institution faces in its portfolio.
Our goal, on the other hand, is to construct portfolios that capture risk-adjusted, market-based returns without the additional expenses and pitfalls of attempting to outperform a benchmark. At the same time, our process is designed to maximize diversification, preserve liquidity, and minimize costs.
Active Risk Management
What We Know
- Markets are efficient.
- Markets provide compensation for exposure to broad risk.
- Markets do not compensate for the additional risk of trying to do better than the market.
- Return is a function of risk as expressed through the asset allocation.
Systematic Security Selection
How We Manage
- We actively manage risk through rigorous analysis of the asset allocation decision.
- We eliminate individual security risk by seeking out low-cost, broadly diversified, liquid instruments.
- We do not incur the expense or the risk of individual investments in trying to beat the market.
- We rebalance quarterly to maintain appropriate risk.
While we strive to avoid individual security and manager selection risk, our portfolio construction methodology is anything but “passive”. We develop weights to equity asset classes by using a proprietary methodology that maximizes the ratio of returns to risk. We further diversify by considering returns, risk, and correlations among equity classifications to arrive at a portfolio that consists of 10 individual asset classes.
Nor can our methodology be considered “indexing”. We seek to replicate broad markets at low cost, but both our portfolio construction and the instruments we use have slight tilts toward factors that have a well-documented record of contributing significantly to return. We add bonds to the portfolio to arrive at an asset mix that is consistent with your established goals and objectives.
