As the investment arm of many independent broker dealers and registered investment advisors, a request we receive frequently from advisors and their clients alike is to describe our investment philosophy and process. In a nutshell:
“Good investment advice is repetitive and boring. There is nothing exciting about it.”
We’ll try not to make this series repetitive and boring, but there is some truth to that tweet by D. Muthukrishnan, a CFP in India.
Brad Alford and Anna Dunn Tabke, the firm’s principals, each came from the institutional investment world. This experience forms the foundation of Alpha Capital Management’s investment philosophy. The institutional community has a reputation of being a bit stodgy and old-fashioned; sometimes that is true, especially given their size and all of the processes and procedures needed to make a portfolio change. But old-fashioned or not, Alpha Capital Management believes that taking a long-term investment view, as the institutional community does, is a great way to add value for clients. Although individual clients do not have the benefit some institutions do of an unlimited time horizon, these clients can nonetheless benefit from the stability of this investment approach.
In this series, we’ll cover several different aspects of our investment philosophy and process:
- Part One discusses why we take a long-term investment approach to portfolio management, grounded in our experience in institutional investment management.
- Part Two examines in detail our approach to manager due diligence and selection. We believe that this is a distinguishing characteristic of our firm and an area in which our skill-set shines.
- Part Three reviews our portfolio construction process, including our views on active vs. passive investing, and demonstrates how our institutional approach to due diligence and our long-term approach come together in a client portfolio.
An Institutional Approach Built On Experience
Brad began his investment management career in the late 1980s at the Emory Endowment, when the portfolio was mostly Coca-Cola stock. He worked there during an interesting time, as the endowment transitioned to a diversified portfolio. He later moved to the Duke Endowment in the 1990s, where he ran the alternatives portfolio. The Duke Endowment was a ~$2B portfolio, and even back then, it was passively invested in US Large Cap equity with a 50% weight to alternatives – the endowment model.
Anna Dunn Tabke, our head of research, also came from the institutional investment world, working as a consultant at Rogerscasey and Mercer with large and mid-sized corporations, endowments, and foundations, so she developed a very similar investment philosophy and mindset to Brad’s.
Why Do We Believe in This Method?
Going through 2008 with institutional clients was an interesting – and somewhat terrifying – experience for Anna, a newly minted consultant. Consultants typically meet with their clients quarterly, a month or two after quarter end. The client’s board usually has to meet and approve portfolio changes before trades can be made. That means that after the fourth quarter market crash of 2008, it was late January or early February 2009 before consultants were meeting with boards, and by that time, much of the damage from the global financial crisis to investments was already done. Although clients were not happy with their performance, many stayed fully invested and were able to participate in the market rally when it came in 2009. To us at Alpha Capital Management, this is the beauty of the long-term investment approach – it helps to prevent investors from making ill-timed decisions based on short-term events and performance rather than long-term views.
Easy to Say, Hard to Follow
We are not tactical traders. There are plenty of tactical ETF strategists for advisors and clients who crave a more active approach. We caution that a tactical trader has to get three components right to earn a good return: the investment itself, timing the buy, and timing the sell. This is a very rare skill, and the consequences of miscalculation can be high.
Even financial professionals who take a more long-term, strategic approach are subject to blind spots and short-term decision making. One recent example was Master Limited Partnerships (MLPs), a play on the energy sector, a bond substitute for portfolios reliant on income, or a long-term growth story (depending on who you asked). To an investor considering them in 2013 or the first part of 2014, MLPs had performed very well over the past five years and offered attractive income prospects along with a solid long-term growth story. Before mid-2014, most market participants didn’t see oil prices falling significantly and then staying range-bound. In fact, notes from a call we held with a global investment bank in December 2013 estimate a low of ~$80 per barrel of oil, due in part to strong global demand.
Of course, this was somewhat irrelevant to the MLP discussion because, as MLPs focus on distribution (think pipelines), the price of the commodity shouldn’t matter as much as the volume of the commodity that is being distributed. Historical correlations between MLP prices and oil prices were low. Until they weren’t. Oil prices fell dramatically, going from ~$96 per barrel in August 2014 to below $30 by mid-February 2015. The Alerian MLP Index, a popular benchmark for the MLP asset class, had a maximum drawdown of -48.5% from August 2014 to February 2016. An equity researcher at Wells Fargo estimated that MLP funds saw $890 million in investor outflows in the last six months of 2015. To many of these investors in hindsight, MLPs looked like more of a tactical trade than a core portfolio component when the anticipated returns didn’t materialize.
Understanding the characteristics of an investment, its expected performance in various market environments, and the manager’s skill-set in that asset class are key considerations at the outset that also help investors evaluate whether the investment is meeting expectations or whether something is wrong. Part 2 of this series will address how we approach manager due diligence to gain an understanding of these key considerations.
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