Our investment approach strives for outstanding risk-adjusted returns across a range of market conditions. The central tenets are:
- Strategic & tactical asset allocation
- Broadly-, globally-Diversified balanced approach
- Low transaction & ownership costs
- Tax efficiency
Strategic & Tactical Asset Allocation
Strategic Asset Allocation – We seek underappreciated assets with a high likelihood of solid long-term returns. Out-of-consensus, misunderstood or newer types of assets without an established following often populate WESCAP Group portfolios. Nevertheless these assets in aggregate need to have a high margin of financial safety, so that the underlying assets can operationally continue and even thrive during periods of financial turbulence. Undervalued assets are identified by comparisons of numerous fundamental investment characteristics, which for equities often includes earnings, margins, return on equity, debt coverage, cash flow, barriers to entry, competitive advantage and both growth and decay attributes. Sensitivity to labor costs, interest rates, currencies and commodities and energy costs are a few of the factors that are reviewed. For fixed income investments, interest rates and credit spreads, the yield curve, potential default and loss rates, duration, maturity, and income tax attributes are heavily relied upon. An economic overlay is included, such as the effects of the business cycle, changes to monetary and fiscal stimulus, currency conditions, inflation and differences between U.S. and foreign economies and markets.
The concepts of classic Modern Portfolio Theory (MPT), volatility (risk), expected return and correlation between different assets are then used to derive a range of highly-diverse portfolios with different mixes of favored assets with a wide range of risk and return characteristics. These are then applied to various individual client situations and modified as needed for the unique needs of each individual investor.
Tactical Asset Allocation – Particular assets may be emphasized more heavily than typically when they offer greater than typical opportunity. These opportunities may be driven by many factors, such as historically inexpensive valuation, larger margin of safety, deep discounts to net asset value (e.g. closed-end mutual funds), contrarian reversion-to-the-mean expectation, or inflection points in the business and earnings cycle. Temporary uncertainties in market, legal or regulatory frameworks can yield short-term opportunities that should not be ignored. Technical indicators, when they reach various threshold extremes, may influence investment decisions. These could include insider selling volume, volatility indices, sentiment indicators, earnings surprise and revision ratios, investment flows, and others uniquely important to the time period.
Broad Global Diversification
Our open architecture approach allows us to provide our clients with exposure to a multitude of asset classes and strategies, some of which are unfamiliar to many investors. Moreover, some of our core investments are unavailable to retail investors and clients of other financial services firms. Our clients have at one time or another owned:
- Large and small cap U.S., European, Japanese and emerging markets stocks.
- Short term, intermediate and long-term municipal bonds, corporate and convertible bonds,
- European and emerging markets bonds, high yield bonds, and emerging markets money market funds.
- U.S., European and Asian real estate.
- Bankruptcy securities, merger arbitrage, convertible bond arbitrage and other hedged strategies.
- Natural resources and commodity-linked securities.
We take a proactive, balanced approach and are early adopters of new asset classes which are likely to benefit our clients’ portfolios through risk reduction and/or enhanced returns. An example would be the use of the only (at that time) available emerging markets currency fund to capture high current yield and exposure to currencies in trade surplus countries.
Contrarian / Value-Oriented Approach
As contrarian investors, we are constantly looking for opportunities in out-of-favor assets because such investments often provide attractive returns for patient investors. Past examples of contrarian investments we have made on behalf of our clients include drug stocks during the Clinton administration, Texas real estate during the oil bust of the early 1990’s, and savings & loan companies during the savings and loan debacle of 1991.
Efficient Transaction & Ownership Costs
WESCAP Group seeks the best means to invest in various asset classes. We attempt to minimize costs whenever reasonable to do so. Because of our open architecture approach, we can consider gaining asset class exposure through many investment vehicles. Among open-end mutual funds, many of the funds we use are the institutional class shares, which have lower costs than average retail mutual funds. To further minimize transaction fees, account rebalancing is done judiciously.
At times, we can allocate less tax efficient (but attractive) investments to tax-deferred accounts. In taxable accounts we try to hold positions for long-term capital gains unless it is imprudent to do so. We also manage sales in taxable accounts by tax lot and by active tax-loss harvesting, thereby reducing tax liability.