By Scott Graham, CFA, Highland Associates Consultant
At Highland Associates, we believe that understanding is capital. This means that when a client and our firm work together to gain a full understanding of their individual/organizational standing, then we can form a partnership with them that will enable us to build portfolios which will integrate their specific needs, objectives and risk considerations.
This level of understanding goes far beyond taking a survey or comparing their risk profile to others. It’s achieved by our focused team taking the time to truly understand the needs, concerns, aspirations and limitations of all our clients.
Once this has been achieved, we can construct a portfolio that allows our client the best opportunity to stay the course over the long-term and reduce the urge to make reactive changes when markets go through difficult times. Therefore, the focus shifts to our area of expertise: portfolio construction and investing to add value to our clients. This is achieved by our conviction to our investment philosophy and strong belief of our firm that it is better to succeed unconventionally rather than fail conventionally.
What exactly sets our firm apart from others in our profession? We believe the answer hinges on our view in three critical areas.
The first, and most important, has already been covered. It is deeply understanding every aspect of our client.
The second is our belief that value truly matters in investing and (borrowing a line from Mark Twain) that history doesn’t repeat itself, but it does rhyme. This means that we don’t rely on historical data to make our investment decisions. Instead, we look at the fundamental valuation of an investment today and make a determination of expected return and risk into the future. We fully understand that we are not the only investment firm that does this; in fact we know that the vast majority of the firms out there do. What is different about us is that this is only the starting point.
The third and more labor intensive step is that we overlay our view of the current and future global macro-economic environment. We believe this allows us to build portfolios for our clients that protects them during difficult times and provides them with growth participation during sustained growth cycles. We achieve this level of understanding by being independent thinkers that do not rely on others’ research. We take the time to develop our view by our own independent analysis.
The final area of critical importance is understanding that exposures are what drive the returns of a portfolio not set allocations to specific allocations. At our firm, we call this understanding the economic return/risk drivers, and we believe that investments in one asset class can and should act like investments in other asset classes. This means that in order for a portfolio to be truly diversified, a proper examination of the exposures must be completed and the overall asset allocation must align with the investor’s objectives and constraints. We believe that, in general, there are four major exposures that portfolios should have allocations for:
- Crisis/Deflation Hedging Strategies
- Growth Strategies
- Volatility Control Strategies
- Inflation Sensitive Strategies
When all of these areas are properly understood, then the client ends up with a portfolio that is ultimately suited to achieve their long-term needs.
For those who would like further details about these topics, our second quarter letter (Capital Markets Quarterly 2Q12) discusses these topics as well as our current view.