Investment Philosophy
The following tenets comprise the core, fundamental beliefs that guide the investment process at Areté. Currently, we offer one strategy, the All-Terrain Allocation strategy. Short-term trading tactics, short sales, margin transactions, and option writing are not utilized.
Asset allocation is a key function in wealth management.
One of the most important functions for long-term wealth accumulation is to be able to offset the occasionally weaker performance of some assets with the occasionally stronger performance of other assets through diversification. The aggregation of relatively uncorrelated assets moderates swings in portfolio value. In doing so, diversification increases the chances of accumulating wealth (and reduces the chances of suffering significant losses) over a reasonably long investment horizon.
Mispriced assets are an important source of performance.
One of the keys to investment performance is finding and exploiting market inefficiencies. While such inefficiencies can arise in the form of mispriced securities, they can also arise in the form of over- or under-valued industries or asset classes.
Identifying such opportunities begins with the assessment of underlying intrinsic value. When disparities with market prices exist and clear rationale for such mispricing can be identified, there are opportunities to benefit from the differential.
All of this said, we also recognize that during certain times the universe of publicly traded securities and funds that appear to be selling below intrinsic value may become substantially diminished and even negligible. In such times, we may hold a greater than normal proportion of cash in wait of better future opportunities to purchase undervalued securities. As such, we seek to provide attractive long term returns on an absolute as well as relative basis.
Information management is a core skill of investment management.
Analyzing investment opportunities and developing portfolio construction is a dynamic exercise that involves a constant and ongoing process of gathering information, processing it, analyzing it, developing knowledge, and applying it for the benefit of clients. Good information considered in the proper context is essential for good decision making and ultimately, good investment outcomes. Stale information and analyses leave portfolios vulnerable to changing conditions.
While a great deal of investment information is codified in quantitative or other easily captured forms, not all of it is. Narratives can rise and fall in disproportion to underlying objective evidence and must also be considered. Relatedly, information is rarely perfect or inarguably concrete. As a result, the potential for noise and other uncertainties must be incorporated into analysis and decision-making.
Execution is crucial for investment success.
In order to create value, an investment strategy needs to be implemented continuously and comprehensively. Actions speak louder than words. We believe the most effective efforts focus on a few simple, but key, concepts that work to ensure the proper execution of a firm's investment strategy. This approach is notably distinct from the common practice of simply gathering assets.
The first key to execution is structural in nature and involves a firm's independence. By maintaining independent ownership, an investment firm eliminates agency effects which can present a conflict of interest between clients and certain of its ownership groups. Independent ownership ensures that client and manager interests are optimally aligned. In fact, independence is regarded by some industry veterans as a competitive advantage.
The second key to execution is temperament. The best investors tend to have a temperament that provides them the courage and initiative to act, often going against the grain, when opportunities arise. However, the same temperament provides balance such that decision-making is not simply a risk-taking activity, but a very conscious and targeted effort to engage in propositions with high risk-adjusted expected returns.
Finally, another important element of execution is simply doing what you say you do in your investment process. Too often, perfectly acceptable investment processes fail when actual investment activities bear little resemblance to the process described in the marketing presentation. We call this the “marketing gap;” the difference between what is said and what is done. Execution is optimized when the marketing gap is minimized.
Asset allocation is a key function in wealth management.
One of the most important functions for long-term wealth accumulation is to be able to offset the occasionally weaker performance of some assets with the occasionally stronger performance of other assets through diversification. The aggregation of relatively uncorrelated assets moderates swings in portfolio value. In doing so, diversification increases the chances of accumulating wealth (and reduces the chances of suffering significant losses) over a reasonably long investment horizon.
Mispriced assets are an important source of performance.
One of the keys to investment performance is finding and exploiting market inefficiencies. While such inefficiencies can arise in the form of mispriced securities, they can also arise in the form of over- or under-valued industries or asset classes.
Identifying such opportunities begins with the assessment of underlying intrinsic value. When disparities with market prices exist and clear rationale for such mispricing can be identified, there are opportunities to benefit from the differential.
All of this said, we also recognize that during certain times the universe of publicly traded securities and funds that appear to be selling below intrinsic value may become substantially diminished and even negligible. In such times, we may hold a greater than normal proportion of cash in wait of better future opportunities to purchase undervalued securities. As such, we seek to provide attractive long term returns on an absolute as well as relative basis.
Information management is a core skill of investment management.
Analyzing investment opportunities and developing portfolio construction is a dynamic exercise that involves a constant and ongoing process of gathering information, processing it, analyzing it, developing knowledge, and applying it for the benefit of clients. Good information considered in the proper context is essential for good decision making and ultimately, good investment outcomes. Stale information and analyses leave portfolios vulnerable to changing conditions.
While a great deal of investment information is codified in quantitative or other easily captured forms, not all of it is. Narratives can rise and fall in disproportion to underlying objective evidence and must also be considered. Relatedly, information is rarely perfect or inarguably concrete. As a result, the potential for noise and other uncertainties must be incorporated into analysis and decision-making.
Execution is crucial for investment success.
In order to create value, an investment strategy needs to be implemented continuously and comprehensively. Actions speak louder than words. We believe the most effective efforts focus on a few simple, but key, concepts that work to ensure the proper execution of a firm's investment strategy. This approach is notably distinct from the common practice of simply gathering assets.
The first key to execution is structural in nature and involves a firm's independence. By maintaining independent ownership, an investment firm eliminates agency effects which can present a conflict of interest between clients and certain of its ownership groups. Independent ownership ensures that client and manager interests are optimally aligned. In fact, independence is regarded by some industry veterans as a competitive advantage.
The second key to execution is temperament. The best investors tend to have a temperament that provides them the courage and initiative to act, often going against the grain, when opportunities arise. However, the same temperament provides balance such that decision-making is not simply a risk-taking activity, but a very conscious and targeted effort to engage in propositions with high risk-adjusted expected returns.
Finally, another important element of execution is simply doing what you say you do in your investment process. Too often, perfectly acceptable investment processes fail when actual investment activities bear little resemblance to the process described in the marketing presentation. We call this the “marketing gap;” the difference between what is said and what is done. Execution is optimized when the marketing gap is minimized.
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