Managed Portfolios

ATTRACTIVE INVESTMENT RETURNS are driven by aligning with the major tides of change in the world.

CAPITAL IS PRESERVED by mitigating against unexpected risks in a resilient and diversified manner.

We seek to ‘swim with the tide’ as much as possible by having a longer-term momentum/trend following framework incorporated into our investment management process - in a way that complements our valuation and capital flow analysis frameworks (more information below).

We adhere to the nineteenth century Rothschild maxim: "Always leave a profit to the other fellow." We are happy if we capture 70-80% of a major trend; if this is done consistently with a reasonable strike rate, strong returns will be achieved. It is generally the first and last 15% of any trend that is most expensive (i.e. trying to pick the tops and bottoms) and people who chase them invariably suffer in their haste.

At the same time as seeking to align our portfolios with ‘the major tides of change in the world’, we are also seeking to develop a resiliency to our portfolios that gives us confidence that capital should be preserved even if we are temporarily caught ‘wrong-footed’ in one of our more overweight investment positions.

The Portfolio results to date suggest that our Investment process is meeting the capital preservation mandate whilst generating respectable returns overall...

[Click to expand image. Past returns are not necessarily indicative of future results.]

As you can see from the above chart, the PCM Portfolio strategy is uncorrelated, more than 50% less volatile than the Australian Share market and is able to produce attractive returns in a resilient manner.

Portfolio management is both an art and a science. Portfolio returns tend to take care of themselves when you are right and correctly positioned, however the ‘art’ of portfolio construction is to balance the portfolio such that drawdowns are minimised when you are wrong or caught incorrectly positioned.

Our ‘all-weather’ diversification amongst uncorrelated asset classes, in combination with a heavy emphasis towards longer-term momentum/trend following approaches both tend towards minimising drawdown risk and promoting an adaptive and responsive portfolio management framework that should tend towards maintaining a correct alignment to financial market conditions.

In a sense, our approach gives us an objective framework and time to watch patiently to determine in each market whether we are seeing a simple counter-trend move within a broader likely continuation of trend, or a potential new major change in trend

“I began to realise that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its occurrence is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the sing must inevitably run as far and as fast and as long as the impelling forces determine.” ...Jesse Livermore, Reminiscences of a Stock Operator (1923)

When it comes to preserving capital, we posit that there are 7 primary risks facing an investor in liquid exchange-traded securities (such as are held in PCM Portfolios), click to expand image:

We assess RISK within each asset-class (cash, equities, bonds, precious metals, currency) according to three essential factors, (a) trend following principles, (b) asset class valuations, and (c) capital flows and liquidity dynamics.

1. TREND (LONG TERM MOMENTUM) – we seek to swim with the tide rather than against it. We utilise a low-frequency (multi-year) systematic trend following methodology that can be objectively stated. This approach allows us to avoid being on the wrong side of broader market trends for too long. Also, with every overweight asset class exposure, we have a ‘line in the sand’ (or stop loss price) which if crossed will automatically cause us to start reducing our exposure. We do not aim to capture 100% of a multi-year trend (i.e. we are not interested in trying to pick tops or bottoms), but rather we have a methodology designed to target the ‘middle 70%’ of the move. [The idea is to follow longer-term momentum in asset classes and being very mindful of valuation extremes.]

We diversify across many different Asset Classes in a way that doesn’t require us to ‘predict’ what happens next in the world, rather we use our long-term trend-following methodology to simply ‘adapt’ (or flow) with whatever happens.

Quite simply, if the trend is up we will ‘overweight’ that asset class,

if the trend is down we will ‘underweight’ the asset class.

In this way we can be confident that we won’t be too out of line with what is happening in investment markets and from time to time we will also capture (or avoid) big moves that can help to generate higher than normal returns when they occur.

“Our grand business is not to see what lies dimly at a distance, but to do what lies clearly at hand.” …Thomas Carlyle (1795-1881)

2. VALUATION (RISK PREMIA PRICING) – we do not believe in a ‘perfect’ valuation approach to an asset class, rather we seek to use a variety of historically robust methodologies in order to gauge valuation. We are also mindful of the fact that ‘value’ also is a relative concept and can often evolve in non-linear ways within the complex adaptive system that is ‘the world’.
3. CAPITAL FLOWS – we seek to understand the nature of the capital and liquidity flows that are underpinning the dynamics of the asset class in question. We maintain a large array of both proprietary and non-proprietary models and frameworks in order to objectively measure and gauge liquidity and capital flow dynamics for each major asset class and currency in the world.

“Patience is power. Patience is not an absence of action; rather it is timing; it waits on the right time to act, for the right principles and in the right way.” …Fulton J. Sheen (1895-1969)

We believe it is safer to act on general (broad-level) information as opposed to specific information (which can be concealed or manipulated). We also observe that the primary determinants of a portfolio's success are more influenced by macro-economic factors and asset allocation decisions than specific bottom-up stock-picking decisions - especially in the context of a constantly evolving landscape.

See also: Understanding 'How We Think' Investment Presentation: Click Here

In addition to the above 7 Primary Risks, what else do we believe about Risk?

1. The antidote to risk is knowledge (Warren Buffet)
2. The greatest determinant of risk is found in the quality of the analysis and decision making processes leading up to the assumption of the risk exposure.
3. Once we have assumed a risk exposure, we manage it in the context of three dimensions: price, time and information flows (that are either confirmatory or otherwise of our thesis and systems pertaining to the asset class/currency in question)
4. That there is unnecessary risk (which must be identified and eliminated at all costs) and necessary risk (which must be assumed only on the basis of significant insight, awareness and calculation)
5. That anyone charged with the stewardship of risk must operate with the highest levels of accountability (and transparency before that accountability).
6. That risk expands with the efficiency we build into the system, and is diffused somewhat according to the resiliency we build into the system; we therefore aim to be at least two-parts resilient to every one part efficient, twice as quick to move towards resiliency as we are in moving towards efficiency. See here for further information about this principle. 
7. The greatest mistake in life is to try to avoid risk in its entirety; rather risk should be embraced but only in a highly calculated and diligent manner.

"There is no security on this earth; there is only opportunity." ...General Douglas Macarthur

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