Risk management is guided by a client’s goals and constraints. Within a client’s risk tolerance we seek to minimize risk for a given level of return. We believe risk is best managed through careful research during the buying process and secondarily through ongoing surveillance of fundamentals and valuation. Active management is important, as valuations change more than fundamentals.
Transformative events are often unpredictable, so we aim to select securities that can weather such events rather than trying to predict the unknown. Additionally, we have found risk is not mitigated by staying close to an index, as risk is absolute and not relative. Because highly quantitative risk models have proven ineffective over the last cycle, we believe risk is better managed by focusing on fundamentals.
During the pre-buy analysis and the surveillance of fundamentals and valuation we discuss many factors, focusing primarily on the following touchstones:
|If the market falls, the stocks in your portfolio will fall.||Assets diversified across multiple asset classes.|
|Stocks within sector move as a group e.g. technology stocks.||Broad industry and style diversification. Company diversification within sector.|
|Each company has its own specific risk factors.||Fundamental company analysis. Control of position size.|
|Great companies may be poor investments, if you overpay.||Appropriate valuation for growth rate.|
Interest Rate Risk
|If interest rates go up, bond prices fall.||Manage duration to guidelines and ladder bond portfolios to diversify impact of non-parallel interest rate shift.|
|If credit quality deteriorates, spreads widen and bond prices fall.||Take more credit risk in shorter maturities where price volatility is less severe. Diversify holdings.|
|Inability to buy or sell at market prices.||Manage liquidity to guidelines and diversify less liquid holdings.|