individual investors differ from institutions
TRANSCRIPT
With the S&P 500 Index flat thus far in 2015, our Investor Objective Based Portfolios are
experiencing exceptional returns[1]; +12.3% Japan, +9.9% High Growth, +9.7% Euro
Centric, +7.2% MicroCap, +6.7% Emerging Markets, and +5.7% High Dividend.
Our success, we believe, lies in the fact that these portfolios are designed to achieve
the stated goals of individual investors, such as High Growth, High Dividends, Capital
Preservation, etc.
Institutional Managers on the other hand generally utilize “Market Definitions” such as
Domestic Large Cap, Mid-Cap and Small Cap along with a strategy descriptor such as
Value, Growth or Blend.
In our view, unless an investor has an in-depth understanding (risk, value, investment
cycle) of the entire market and the various segments within, knowing that a portfolio is a
Large Cap Value Fund is not particularly useful.
Institutional Investment Committees with the assistance of consultants, strategists and
analysts set targeted percentages for each market segment such as Large Cap Value,
Large Cap Growth, Small Cap Value, Small Cap Growth, etc. While the amounts
allocated might be reviewed and adjusted quarterly, the time frame for being invested is
often perpetual and thus quite different from most individuals.
Investor Objective Portfolios may find themselves with large allocations to a particular
market segment (e.g. many High Growth Funds invest heavily in Info Tech and Biotech
stocks), but we believe that investors seeking consistent growth require more freedom
to pursue the investor’s stated goal.
For example, an investor following an institutional allocation approach might choose to
invest in a Small or Mid-Cap Domestic Fund for his allocation to growth which may be ill
advised for the following reasons:
If an investor enters a segment at a time when it is overvalued, it may
take years to catch up or to show above average growth.
Some of the greatest growth stories over the last five years are IPO’s
which have become mega-cap companies and would have never been
suitable for purchase by a Small or Mid-Cap Manager. Examples include
Google, Tesla, Under Armour, Facebook, Visa, Alibaba, etc.
Fast growing and well-run companies can be found across all
geographic borders. Therefore, a food company selling noodles in China
might be outgrowing Facebook and may offer a better investment
value.
A well run small cap company may ultimately become a large cap
company thus requiring sale by a small cap manager. A growth
manager will hold the company as long as growth remains exceptional
relative to the market.
Twenty years ago, managers began to realize that “Institutional Think” and “Herd
Mentality” might not be in the best interest of their investors and created Hedge Funds
to provide more freedom to pursue investor goals across multiple assets classes.
And while most Hedge Funds have morphed into vehicles that offer disproportionately
high risk to justify high fees, we feel that the initial concept of providing manager
flexibility to meet investor objectives is sound and well suited for the individual investor.
Bear in mind that all managers encounter periodic macro headwinds, most of which are
unpredictable in terms of onset and duration, but these headwinds are often temporary.
Therefore, a high dividend portfolio manager who holds top tier companies across
different market segments, industries and geographic boundaries may be negatively
impacted by an unexpected Fed announcement of raising interest rates. Growth
strategies on the other hand might be adversely impacted by a GDP Report that falls
short of expectations.
However, the portfolios that come back the fastest and resume satisfying investor goals
are the ones that hold the best companies and resist panic selling and return chasing.
Thus, we recommend that investors identify managers who have a track record of
finding exceptional companies and remaining patient and rational during turbulence, a
process which is often rewarded with strong results, such as +10% in the first three
months of a sideways year.
The preceding represents the views and opinions of The Stanley-
Laman Group, Ltd., a Registered Investment Advisor serving
individual and institutional investors and is not intended as
investment advice nor are the opinions offered suitable for all
investment objectives.
[1] Returns are based on SLG separate managed account composites for 1/1/15 –
3/31/15