As I mentioned in the last quarterly report, I am reformulating Arete’s investment strategy and have continued making progress on the that front. Indeed, the continued runup in stocks in the first quarter despite obvious signs of euphoria and disconnects from underlying fundamentals has made it clearer than ever that investing in stocks alone is a venture fraught with risk.
At the same time, the distinct possibility of both deflation and inflation occurring in the next few years makes clear that the risk of just sitting in cash and waiting for something to happen is also high. What is needed is a more diversified approach that can make progress regardless of the environment – and that is what I am working on.
Diversification is a key element of the approach, but I am going to apply it in a different way than many advisors do. Specifically, while the notion of diversification has become mantra to the investment community, the way it is normally practiced is by allocating funds variously between stocks and bonds and US and foreign markets. The problem is while the names of these “asset classes” are different, their return streams are usually highly correlated.
Instead, I am going to focus on uncorrelated streams of returns. Gold is one of those and commodities is another. I don’t plan on investing in either of those directly but there are funds that do and can create appropriate exposure.
In many ways this effort is simply a more expansive way to accomplish the same things I have been doing with the stocks-only portfolio. The limited universe of investment options, however, significantly constrained my ability to adapt to the environment as monetary interventions increased and macro themes overwhelmed idiosyncratic stock activity.
As I continue formalizing these plans, a few things will change. For example, since portfolio characteristics will no longer be very relevant, I will stop reporting those. Asset allocation will be more relevant so I will report that instead.
Performance reporting will also be different. Since the structure of the strategy and its benchmarks will be different, GIPS standards will require separate reporting. Each client will continue to have access to inception-to-date performance, however. Related to these changes, I will also stop reporting performance to various consultant databases.
I’m sure there will be other changes to be made along the way and I will keep you posted as they arise. If you have comments, questions, or concerns along the way, please let me know I will get right back to you.
In sum, I am both excited and anxious about these changes. Rest assured, I do not take them lightly. While there is a part of me that hates to “quit” the midcap strategy, there is another part of me that feels relieved to have more freedom to roam where opportunity exists in the markets.
As always, thanks for your support!
David Robertson, CFA
CEO, Portfolio Manager