At the core of our investment approach to manager selection and asset allocation is diligent research. As active investors, we are systematic and persistent in searching for asset classes that are selling at a considerable discount to their fair value. Likewise, we apply our extensive experience in identifying money managers to select only those in whom we have a high degree of confidence in their ability to outperform over the long term. We believe that intensive research and a disciplined process are critical to investment success. In-depth, fundamental research and careful reasoning underlie every investment decision we make.
The following fundamental beliefs form the foundation for our investment approach:
- Global Perspective. Openness to a globally diverse set of asset classes expands our ability to uncover attractive investment opportunities and helps us to better manage downside risk.
- Long-Term Approach. A long-term approach allows us to take advantage of temporarily mispriced investments and typically ensures that fundamentals, rather than fear or greed, dictate asset prices.
- Forward-Looking Analysis. History provides a valuable frame of reference but does not always apply to the current environment. We seek to learn how the world is evolving and incorporate our opinions about these changes into our assessment of risk and investment allocations.
- Discipline and Conviction. We set the bar high in assessing investment opportunities, and we have the discipline and conviction to act on an opportunity we find compelling. We believe that investors who lack the courage to act on their convictions are destined for mediocrity.
- Innovative Thinking. Our willingness to think outside the box allows us to identify unusually compelling investment opportunities. This has been an important part of our competitive edge and our long-term success.
- Broad Access to Talent. Accessing investment talent from outside firms, via mutual funds and private investment vehicles, allows us to incorporate a high level of expertise in a variety of asset classes that would otherwise not be available from a single firm.
Our research-intensive investment process focuses on adding value over the long run in two ways:
- First, we use a tactical asset allocation approach that overweights asset classes when we believe they are priced at bargain levels.
- Second, our investments within asset classes are chosen based on our extremely thorough due diligence. Our underlying investment philosophy demands that all asset class overweightings and manager allocations be based on a very high level of conviction. We believe that setting the bar high significantly increases the probability of success over a market cycle.
Our investment portfolios take into account both short-term downside risk and potential long-term returns and are implemented using the following steps:
- First we establish a neutral allocation for each portfolio type.
- Next, we shift our asset allocation away from the neutral allocation only when there are tactical opportunities:
- When one asset class is extremely undervalued relative to competing asset classes
- When cyclical or other factors don't significantly detract from the valuation story
- When long-term trends that we believe will have a major impact in defining the upcoming investment climate don't detract from the valuation story
- Finally we use scenario analysis to test the portfolios exposure to various downside risks.
Our asset allocation targets are met using investment managers that we are highly confident will beat a comparable index over the long term. Our manager selection process involves extremely thorough due diligence on the management team, investment process, company culture, and performance results. Our selection process includes the following steps:
- We apply quantitative screens (such as performance, fees, asset levels) to narrow the very large universe of investment managers to a subset meriting further research.
- We conduct extensive qualitative due diligence, including site visits and numerous personal interviews with the manager, analysts, and team.
- We select and monitor only a small number of managers in each asset class who we have determined possess an investment process with an identifiable and sustainable competitive edge.