For most people, losing money feels bad more than making money feels good. In other words, fear is more powerful than greed. Moreover, if you had $100,000 and lost 50% you would be left with $50,000. In order to get back to $100,000, your $50,000 would need to double and grow by 100%, not 50%. Therefore, in terms of emotions and pure numbers, large losses in a portfolio need to be minimized.
- A two-pronged approach - Momentum and Value Investing
We use a two-pronged approach to investing that are comprised of academically well-established drivers of return for long term investors. The two prongs operate over different time frames and hence are a hedge to one another, often being inversely correlated.
Momentum – Those assets that have been performing well in the short term past will typically continue to perform well in the short term future. We use a proprietary algorithm that incorporates short-term risk, return, and correlation to give us the appropriate momentum based allocation. Momentum operates over a short term time frame.
Value – We conduct a top-down active asset allocation approach where we look to invest in assets that are trading below their intrinsic value. The allocation is filtered through an experienced view on macroeconomics, market cycle, asset class, regional/country exposure, and sector. Value operates over a mid to long term time frame.
2. Minimize Correlation - We invest in assets that move independently of one another so that whilst some assets are going up, others are going down, and then vice versa. The net result is smoother overall volatility.
3. Minimize Loss Potential - We construct portfolios based on how they respond to market losses, emphasizing strong Sortino ratios (downside risk-adjusted performance) and lower downside capture ratios.