Broadly, our investment philosophy is derived of a fundamental observation that, contrary to popular (some call it modern) investment theory, markets are inefficient. Experience and empirical historical data have taught us that investors frequently exhibit irrational behavior in arriving at, and executing upon, investment decisions. This is especially true during periods of extreme market stress (witness investor capitulation in 2008 or the tech and real estate bubbles of the past twelve years). In short, it is much easier to talk about being “disciplined” in the context of one’s investment approach than it is to resist the prevailing consensus opinion. A recognition and understanding of the investor behavior that influences market valuations gives us the discipline to exploit pricing inefficiencies through active management.
We exploit, or account for, the inevitable inefficiencies of the markets by adopting a comprehensive view of the capital markets that allows us to maximize client returns while managing downside risk. We do this by complementing our historical core competency in the active management of domestic equity and fixed income portfolios with exposure to a full array of asset classes (i.e., foreign equities, real estate, high yield bonds and, where appropriate, commodities) through low-cost exchange traded funds.
In contrast to the conventional approach to diversification, however, our objective is not simply to reduce volatility. We view lower volatility as a welcome by-product of adding the next return-seeking asset to a portfolio of assets to which it is not perfectly correlated. That is, we see diversification primarily as a means of achieving higher returns. Diversifying simply for the sake of being diversified often comes at a high long-term opportunity cost and has proven ineffective in periods of stress in the markets as many of the so-called diversified asset classes have proved stubbornly correlated with the S&P 500, for example.