1Why not a 60:40 portfolio ?
The 60:40 model (60% allocated to equities, 40% to bonds) has worked well for the last several decades, during which period interest rates enjoyed a secular decline. Interest rates now cannot conceivably fall much lower but they could plausibly rise, quite dramatically from their current artificially low levels. Given prevailing valuations in the bond market, that completely invalidates the argument for holding debt in any form. The 60% allocation to equities is more nuanced, with no shortage of investible opportunities globally but with the broad US stock market trading at rich valuations – most notably in the technology sector. As a result, we do not benchmark our portfolios to market indices per se, but rather against real returns.
2What is your track record ?
Our discretionary client portfolios are bespoke; however, we manage a UCITS equity fund, the performance of which can be tracked on our website via its factsheets.
3Do you have any skin in the game ?
The private portfolios of the directors are managed on the same platform and along the same lines as those of our clients. In addition, the company’s balance sheet is also invested along the same lines as our client portfolios. We are happy to eat our own cooking.
4What does cash-flow yield mean ?
We prioritise cash-flow as it is the purest form of corporate earnings, the least subject to manipulation. Our investment thesis is that earnings drive share prices over the medium term so we prefer earnings to be robust, and not derived from changes in the values of assets and liabilities. The cash-flow yield is the annual rate of return we would receive if we bought all the outstanding debt and equity of a firm, thereby taking it private.
5What is your ESG policy ?
Because we seek the broadest opportunity set possible, we do not restrict our investments by either country or sector. We view the most important element within ESG to be the last, namely good corporate governance. We will not invest in companies or countries which we have identified as having questionable governance. We will also be driven by a consideration of political and ethical issues. Further to our own policy, we are also happy to tailor portfolios to the ESG preferences of our clients.
6How do you protect against inflation ?
Inflation is primarily a monetary phenomenon and it occurs when governments and central banks essentially lose control of monetary policy. We consider the best protection against inflation to be real assets, including the productive and purposeful endeavour of entrepreneurs operating in the real economy. Historically, commodities have been a time-tested hedge against runaway money printing. Because we favour a process over a product, we are naturally drawn to the equity interests of sensibly priced, low debt, cash generating businesses operating in the commodities arena.
7Do you try and time the market ?
From experience, market timing is impossible. Rather than attempt it therefore, we will invariably be fully invested, albeit across a range of assets with diverse and weakly correlated attributes. It may appear to be attractive to be ‘out of the market’ during periods of seeming overvaluation, but the decision to be out of the market gives rise to another problem, namely when to get back in. Historically, those periods that have been fantastic entry opportunities after the fact (e.g. March 2009) felt at the time like the world was going to end. To avoid such psychological challenges, we prefer always to remain sensibly diversified in assets that are priced to deliver attractive returns over the medium term.
8How do you measure risk ?
Most conventional asset managers define risk as the annualised deviation of return, i.e. the price volatility of the portfolio and each of its underlying holdings. This strikes us as unduly simplistic given that all financial markets fluctuate in price in unforecastable ways. We prefer to define risk as the likelihood of total capital loss, which is irrecoverable. This means we focus on absolute return investing and on investments possessing a margin of safety. This naturally leads us to be wary of poorly capitalised firms and of firms with insufficient cash-flow generation.
9What are your thoughts on cryptocurrency ?
In principle, we support a free and open market in currencies. However, we favour economic assets and feel that neither fiat currencies nor crypto currencies can be considered factors of production. As a relatively recent medium of exchange, crypto currencies lack any track record for being a store of value. They are, by definition, more speculative than we would prefer.
10What are your macro forecasts ?
We simply don’t have any. We have views about the plausible evolution of markets but from experience, macro-economic calls are always inherently subjective. Our best investments historically have all been derived from bottom-up valuation analysis - and we do not expect that trend to change in the future.