Symons: In general, I think we're unusually focused on risk-reward in building durable wealth for our clients. We want to be involved in situations where we get the biggest reward for the lowest risk. That's why we spend so much time on macro work - it lets us know what's likely to work. That should allow us to provide better downside protection. That's what some newer risk metrics try to measure - things like active share, Zephyr pain index, and the omega ratio. First, it's idiomatic, but if you want results different from the market, you can't be the market, which is what active share addresses. All active share asks is how different from the index your manager is. That's particularly important when the market is going down. The Zephyr Pain Index is about investor stress - how much of a drawdown have investors been faced with and how long does it take to regain that drawdown? Again, our risk-focused method has led to less pain. The omega ratio is basically a version of the Sharpe Ratio that considers gains relative to losses - it's more sensitive to the risk-reward of a strategy. By having risk-reward foremost in our process, we can provide a relatively smooth ride in a relatively volatile asset class.
Hortz: With an accelerating rate of business innovation and disruption hitting all industries, how do you assess corporate managements in your fundamental analysis of a company? How do you determine the level of management risk being taken in that stock position?
Symons: Sometimes it's tough, because there are a lot of voices involved. Does management have the faith of shareholders? If yes, that lets them do a lot more, or gives them more rope to hang themselves. ROE and debt levels versus their industry can generally tell us a lot about what kind of job management is doing. ROE can help us see management quality while debt lets us see how much risk they're taking.
Hortz: How do you recommend advisors best position your funds in their client’s portfolios?
Symons: With our consistent risk protection focus, we're a nice counterbalance to most active and passive funds. What we do tilting portfolios toward unpopular stocks that to us have good risk/reward profiles is psychologically unpleasant and thus not done very much. And based on that Cerulli study you mentioned, you need to add focused risk managers to your client portfolios as markets struggle.
Hortz: Any last recommendations you can make to advisors on how to look at the active versus passive investment debate?
Symons: Passive is a reasonable choice, but it also takes a stronger stomach than most people realize. The problem is that the fear-greed cycle makes people want to make the wrong decisions both ways. Active can potentially help to counterbalance that by creating some true diversification. That's particularly true right now, when unusually few stocks have such a large impact on so many indexes and ETFs.
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