Commentary

From The Desk of the CIO – Our Investment Philosophy

by Kevin Burrows

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails
— William Arthur Ward

The creation of asset management solutions is a key aspect of our family office wealth management services.

Our Investment Philosophy – Absolute Return Investing

  • We believe in the long-term protection of capital through absolute, not relative, return investing
  • Outperforming Cash[1] is our ultimate goal, not simply outperforming an index
  • Risk is defined as a Permanent Loss of Capital which prevents the achievement of our client’s goals

As benchmark agnostics, we create and manage innovative and diversified investment portfolios. Achieving a satisfactory absolute return is the primary component of every investment decision we make. In order to manage risk on an absolute basis, our portfolios may forego excess relative performance in rising markets in an attempt to minimize downside losses during negative market conditions.

Investment Pillars

  • Long term Investing
  1. Outperformance requires a long-term outlook with continuous adjustments to the portfolio
  2. Compounding is a powerful force – reasonable returns compounded over long periods can produce astonishing results and is more effective if large losses are avoided
  3. Costs and taxes have a significant impact on net returns and should be minimized
  • Asset Allocation (the mix of asset classes) is an important driver of return
  1. Diversification has benefits, allowing investors to reduce risk without necessarily sacrificing return
  2. Assets that are uncorrelated (or have low correlations) help to reduce total portfolio risk
  3. Tactical asset allocation and security selection and also contribute to returns
  • Valuation is an important determinant of future returns
  1. Price and value ultimately converge, creating opportunity when they deviate
  2. Over the short term, market psychology, sentiment and emotions play a strong role in market movements, creating noise which can mask the fundamental characteristics of an investment
  3. An investor is often rewarded for assuming the short-term discomfort of other investors by doing the opposite trade
  4. Have patience in identifying opportunities and be willing to hold cash in the absence of attractive valuations
  • Stewardship principles increase the odd of meeting our clients’ goals
  1. Risk is not simply the “volatility” of an investment but also the “shortfall risk” of not achieving a client’s goal
  2. Investing, by definition, involves assuming risk. We strive to effectively manage this risk through diversification at the asset class, manager and security level, and also by adhering to a robust, valuation-based investment process
  3. Investor education and effective communication are critical (and often overlooked) components of a successful investment strategy

Asset Allocation

  • Our investment process involves assessing the relative merits of allocating within and between the four broad asset classes: Equities, Bonds, Alternatives and Cash
  • Many inputs go into our allocation decision-making process. Part ‘art’ and part ‘science’, the evaluation of these indicators determine our asset class weightings versus our benchmarks
  • Our analysis considers valuation measures, macro factors and sentiment indicators. We also look to take advantage of investment themes which we feel are not widely considered or whose outcome is fairly uncertain. Finally, technical chart analysis assists with making short-term trading/allocation decisions
  • Having set the top-down allocation, investment analysts research appropriate funds to fulfill asset allocation and thematic requirements and make recommendations to the Investment Committee

Manager Selection Principles

“An in-favour style, slick marketing presentation and an articulate fund manager can easily create the illusion of true skill. Therefore proper due diligence is a crucial component of manager selection.”

  • Good managers exist but are rare
  • Beating the market is difficult, especially over short term; therefore judge managers over a full market cycle
  • Sometimes investing for market exposure i.e. “passive beta” is more appropriate than searching for manager skill i.e. “active alpha”
  • Investment philosophy and process of manager must be understood and believed in
  • Stability and strength of fund manager/team is important
  • Access to fund manager/team is crucial – No hidden ‘Bernie Madoff’s
  • Alignment of interests / stewards of capital
  • Size is a consideration – in some markets being small and nimble is an advantage
  • Separate operational due diligence process

Risk Management

Benjamin Graham (May 8, 1894 – September 21, 1976), an American economist and professional investor, first defined risk as a permanent loss of capital. Considered the first proponent of value investing, his 1934 book, Security Analysis written with David Dodd, is considered the bible for serious investors.

Tenets

  • When a company is available on the market at a price which is at a discount to its intrinsic value, a “margin of safety” exists, which makes it suitable for investment
  • Market values fluctuate above and below a company’s intrinsic value. Purchases above intrinsic value risk experiencing a permanent loss of capital when the valuation eventually reverts to intrinsic, as it always does
  • Risk is inherent in any investment strategy and cannot be eliminated completely but can be effectively managed.
  • Our primary goal in the management of risk is to protect the portfolio from permanent impairment.

[1] Plus a pre-defined risk premium based on the risk profile of the client/fund