Research Process

Process

Investing Principles

I believe the most effective way to generate market-beating returns is by dynamically adapting to expected market behavior, incorporating protective assets to reduce portfolio volatility and adhering to sensible risk limits designed to mitigate extreme loss.

Investment Objective

I am striving for a return profile analogous to an efficiently laddered long call option on equities. That is, a return stream that generates competitive upside participation, kicks in progressively over time, limits downside and doesn’t cost too much.

Asset Allocation

In order to achieve these goals, I first establish and re-affirm the best portfolio building blocks that I can find. The major ones I use are ‘return drivers’, ‘diversifiers’ and ‘hedges’. I rely on deep historical analysis applied on both a standalone and interactive basis to help establish suitable long-term allocations to each.

Idea Generation

My research process is multi-disciplinary in nature and includes top-down, bottoms-up, qualitative and quantitative methods to help determine current ‘risk appetite’. I then look at the relative attractiveness of individual investments to ensure I am expressing views suitably and optimally within each strategy.

Portfolio Construction

I construct portfolios by combining asset allocation and individual investment views pursuant to established risk limits. These are designed to ensure sufficient upside, portfolio balance and mitigation of extreme loss. Scenario-based analysis, stress-testing and experience help guide these limits.

Implementation

My decision-making process is discretionary. At the portfolio level, I avoid borrowing, shorting or using margin. I have a preference for exchange-traded funds, some of which can use derivatives, leverage or shorting where appropriate. Rebalancing generally takes place at monthly intervals or greater.

Risk Analysis

Prior to portfolio rebalancing, I examine various exposure-based and return-based metrics to assess potential downside return. I routinely examine performance and correlation-based metrics to ensure realized returns are ‘traveling’ within expected parameters.

Long-run performance expectations

Over the long run, dynamic beta management in a sensibly constructed portfolio will ultimately drive returns, alpha and relative drawdowns. Because I am striving for a long-term call option-like return profile, I expect ROI will be maximized over time frames that include at least one bull and bear market.

Short-run performance expectations

In the short run, three decision-making variables will drive performance results:

A focus on gradual shifting

This allows me to focus on bigger-picture macro themes while filtering out short-term noise. This has different implications for portfolio performance depending on the prevailing market regime, how well-telegraphed the regime is and whether or not fundamentals support it.

Fundamentally supported price trends should be best for the portfolio because they tend to be sustainably strong. Conversely, reversals and tail shocks are expected to be worst due to negative impact and unforeseen nature. Choppy markets and those with soft fundamentals should be neutral.

Willingness to push my view when I have the requisite conviction

At times, I may “push” portfolio positions aggressively, either bullishly or bearishly, potentially for extended periods of time. This is in accordance with how I typically build investment conviction, which tends to be cumulatively over time.

In times when I correctly identify and position for an emerging macro trend, I believe the best way to capitalize on it is to remain committed to it in proportion to how well the information flow and ongoing analysis support the original thesis. If the stars align, I press, but remain vigilant.    

Allowing Room for Being Wrong

There are those adverse market moves that I will see coming which I can take measures to defend against early-on, and there are those I can’t. I expect to adapt the portfolio to garden variety recessions or other events lasting at least multiple months or more. Shorter-term events will be path dependent.

For times when I can see adverse changes developing early, I intend to re-orient the portfolio away from danger and then capitalize on the situation if I can. In this case, the speed and significance of portfolio changes will be a function of analytical accuracy, timing and sizing.

For times when I can’t see the danger coming, randomness plays a larger role in dictating whether or not I have time to react to the event or not. That’s the reason I have built-in portfolio stabilizers in the form of ‘diversifiers’ and ‘hedges’ to help dampen (or ideally offset) times when my reaction is too late.