The Opportunistic Approach to Growth Investing
Investing for growth has always centered on an unshakable faith in the future value of an asset. In the golden age of investing in the 80’s and 90’s, cash was literally thought of as trash. Investors used to be able to plunge their conservative money into stock investments, commonly resulting in their account doubling every 3-5 years. Born was the era of “buy-and-hold”, and that unshakable faith was merely tested but once every decade or two. Even over the course of a capitalistic boom-to-bust cycle, the economy would contract and then roar back to life stronger than ever, without the need for quantitative easing or “government stimulus”. It is our inherent resilience and innovation that institutionalized such a bright future for investors willing to take a risk with their hard earned dollars.
In today’s contemporary financial markets, it has never been more important to have a strategy you rely on to guide you through the inevitable ups and downs. I believe that now more than ever, putting aside the “set it and forget it” mentality and actively managing capital will ultimately produce excellent risk adjusted returns. A clear and definable growth strategy will act as a compass that will guide you towards your final destination, consistently pointing you in the right direction. But most importantly, a strategy is a quantifiable set of rules. It describes the way you should react to changes in the financial markets, and the investing atmosphere in which you operate in.
Much has been made on how the markets have changed over the last century, but some of the classic Wall Street truisms remain. I’m reminded of the classic fictional biography about the famous trader Jesse Livermore, Reminiscences of a Stock Operator. The book was published in 1923, however even with all of the modern high frequency trading, complex quantitative analysis, or proprietary algorithms, the psychology of the markets still rings true to this day. The fact is that the markets are not always logical; they are often psychological, with news headlines being most exuberant at market tops, and desperate at market bottoms. This fear and greed cycle only exacerbates the frustration among those that take a firm stance on either side of the bull/bear fence. Which is why we believe the formula for producing consistent portfolio returns is the product of constant adaptability.
Our Portfolio Approach
The primary objective of our Opportunistic Growth Portfolio is to seek low-risk, high reward growth opportunities in a combination of asset classes that shift based on market conditions. We begin by dividing the portfolio into two main components: core and tactical positions. Our core holdings represent exposure to stocks, bonds, or commodities that align with our primary portfolio objective and risk tolerance. From there, tactical positions are evaluated and established based on their technical or fundamental merits. Over time, the portfolio is designed to shift based on low-risk buying opportunities, or high-reward selling opportunities.
Our overarching macro analysis starts with an evaluation of the equity markets vs. its long-term price trend. This research allows us to identify areas of the market, foreign or domestic, that present good relative value. Depending on where the price is relative to this trend, we will seek to purchase funds that present optimal characteristics for positive returns. Part of the active management in our strategy is to use macro thematic research to select areas of the market we believe will perform well over the short and long-term.
Adjusting to Market Cycles
As an example, during bull market up trends we seek to have a higher allocation to stocks and inflationary securities to take advantage of rising asset prices. In this scenario, our portfolios might be allocated toward core positions in ETFs that seek to track the performance of the S&P 500, the technology heavy NASDAQ, or the FTSE Emerging Market index. We would also allocate to tactical positions in growth oriented sectors such as energy, biotechnology, and consumer discretionary stocks to name a few. The remaining exposure would be pointed towards areas of the bond market that perform well in an inflationary environment such as high yield corporate bonds, or floating rate senior loans.
Conversely, when the market falls below its long-term trend or during bear markets, we shift our allocation towards fixed-income and cash to preserve capital. With so much uncertainty, we would not look to risk our client’s hard earned dollars with large core positions in stocks. In this type of environment we would seek the safety of highly rated treasury, corporate, and mortgage backed securities. These high-quality investments provide both income and capital appreciation opportunities, since most bear markets are accompanied by falling interest rates. The remaining cash in the portfolio would be earmarked for the purpose of seeking out low-risk opportunities in stocks once the markets have stabilized, or fallen to levels that present excellent fundamental value.
In a transitional or flat market we may strive for a more balanced weighting across all asset classes, with a mix of equities and fixed-income that comingle well to keep volatility low. Since transitional periods can often last for a long duration, this stance allows our portfolios to take advantage of market upside, while not being over-exposed to any one sector.
The right mix of growth oriented assets and the expertise to navigate through challenging market conditions are two critical components of the Opportunistic Growth Portfolio that Fabian Capital Management has designed from the ground up and implements every day for our clients. Rules and boundaries are administered to keep clients from experiencing the feeling of lost opportunity or lost money. Both can feel equally frustrating.