While we are intimately familiar with the breadth and depth of the academic literature on investments and finance, philosophically we believe that the returns from investing can essentially be reduced to a form of compensation received in exchange for assuming risk. This definition of investing is the point of departure for five foundational precepts that together comprise our investment philosophy.
The primary point of departure of any investment decision is an assessment of the risk of the investment; only after that assessment is made can an estimation of the expected return for assuming the risk be determined. Portfolio construction likewise begins with the determination of a risk budget and return objective and then assesses expected returns within the confines of those parameters. We recognize that all risks are not quantifiable, and have an acute appreciation for immeasurable risks, or uncertainty.
All investing is a forward-looking exercise that requires refined and highly developed risk and return expectations, forecasts, and estimations. Empirical research, in contrast, is backward-looking and, while it can inform expectations, it cannot necessarily be extrapolated into expectations. A discriminating appreciation of both cyclical and secular shifts in economies, geographies, industries, as well as in the evolving structure of capital markets, are a prerequisite to establishing meaningful, useable expectations.
Successful investing incorporates and accommodates a multifaceted respect for context, including:
the economic cycle and prevailing economic conditions
capital market valuations
cross-asset class relative values
cross-market relative values
the preexisting portfolio of investment exposures
As such, investing ‘in context’ demands a cross-sectional research discipline to compliment and contextualize times series analysis.
Buying, selling, hedging, and managing an investment exposure is a multidimensional exercise. Amongst the dimensions that must be considered are:
base case risk and return expectations
upside-downside outcomes in alternative forecasts
potential hurdles in the expected price discovery path
the potential of permanent impairment of capital
the 'margin of safety' embedded in price when compared to the expected risk and return
Despite the cumbersome requirements of disciplined execution, some of the best investment opportunities are fleeting and require expedient, decisive action and a reserve of deployable opportunistic capital, all of which demands continuous preparation of execution parameters, regardless of the anticipated timing of execution.
Investing is a continuous and dynamic process that does not begin with the asset allocation decision nor end with execution; rather it requires a constant and ongoing vigilance whereby each component of the investment philosophy – risk, expectations, context, and execution – is regularly examined, challenged, and either revised or reconfirmed. All disciplined and properly constructed investment processes are predicated on this robust dynamism.