The Institute for Innovation Development recently talked with Luis Maizel, Co-Founder and Senior Managing Director of LM Capital Group - a leading San Diego-based, global fixed-income investment manager servicing public funds, corporations, foundations and top financial advisors, and is also the adviser to the LM Capital Opportunistic Bond Fund (LMCOX).

Besides a rather singular perspective drawn from extensive experience with the global bond markets, the firm’s investment process utilizes proprietary methodologies, including a matrix construction and future-focused scenario planning to address rapid change and uncertainty in business environments and markets. This brings up an important question of how people can adapt their investment approach to an environment of accelerating change and growing uncertainty?

Hortz: Can you describe your proprietary methodology utilizing a global matrix to analyze current data? What does it reveal for you and how does it allow you to weather the volatility of the global bond markets?

Maizel: The matrix analysis is based, in principal, on the work of Nobel Prize-winning economist Wassily Leontief and has been refined for use in our investment process. Leontief advocated input-output analysis, which explores how changes in one sector may impact others. It is a key ingredient in our investment process and part of our value proposition.

LM Capital’s matrix is composed of the following six economic factors: Inflation, Employment, Trade Balance, Budget Deficits, International Influences, and GDP Economic Indicators. Our Investment Strategy Group (ISG) also reviews additional indicators that can impact the above. Within this matrix we thoroughly examine major global bond market indicators, as well as several lesser developed markets on a quarterly basis with a one-year outlook.

It is important to note that investing to achieve consistent returns is about a lot more than dollars and cents. It’s about more than watching interest and employment rates, etc. It’s about identifying a variety of global trends and assessing those trends from the perspective of bondholders. Once we assess whether or not economic trends are attractive, we determine as a team the duration and sector targets. Our position on the yield curve and sector selection creates a diversified portfolio with attractive risk-adjusted returns. We are able to weather volatile markets by participating in up markets and offering downside protection. 

Hortz: While on the Harvard Business School faculty you developed and refined a scenario-planning process. What exactly is scenario planning and how do you apply it to the investment process?

Maizel: Scenario planning is typically the last step in our investment process. It is a proactive, forward-looking tool that provides a blueprint on how to react should the unexpected occur. Once the initial portfolio allocation and construction are complete, qualitative “what-if” scenario planning is deployed to determine which market reactions may occur in response to unexpected future events, either political, economic or social.

When we determine a new “what if” scenario, we contact regional “network partners.” We examine local newspapers and other news and information sources. We query experts in political science, logistics, geo-political issues, etc., depending on the issue or issues. We then build several outcomes, using a decision-tree process, to plan our responses without trying to forecast the possibility of it happening.

There’s always the chance that the so-called “invisible hand,” may surprise us. This is not necessarily in the form of a traditional economic event. It can be an extreme weather event, a strike, an earthquake, or a sudden military act or the threat of one. We peer behind the curtain to examine the good, bad, and ugly prior to making provisions for such events. It can be difficult to quantify a subjective event, which is why, for each scenario, we model our portfolio so we know how to respond.

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