Ari D. Sass, President and Portfolio Manager of Equities at M.D. Sass, has 18 years of investment management experience with the firm. Prior to his current role, Sass served as CEO and Co-Founder of Insound, LLC, Manager of Finance at Elektra Entertainment Group, and various positions at Bear Stearns and Deloitte and Touche. Sass holds an M.B.A. from New York University and a B.A. from the University of Michigan.
Russ Alan Prince: Tell us a little about M.D Sass as a firm, where you are focused, and how you’ve changed and grown over the last 3+ years.
Ari Sass: Overall, we manage several strategies, equities which I lead, a fixed income group, and a few alternative strategies that we’ve seeded and incubated over the years.
We are celebrating our 50th anniversary this year, a milestone that has provided us an opportunity to reflect on the firm’s growth over the last half-century, providing valuable insight as we look ahead to the next 50 years. This longevity coupled with our way of analyzing market conditions has allowed us to successfully navigate turbulent times during multiple market environments and economic cycles since our founding in 1972 by my father, Martin Sass.
I joined the firm 18 years ago as an analyst on the equity team under the tutelage of my father and became portfolio manager of equities on January 1, 2019. With that change, we also took the opportunity to make meaningful changes to the investment and portfolio construction process, so to be in compliance with Global Investment Performance Standards, we effectively had to start over. We are very pleased with our performance so far—eVestment has ranked our strategy’s cumulative performance in the top one percentile of our peer group. In the last four years, we’ve had two bull markets and two bear markets, and outperformed our index every year thus far, which speaks to the quality of the team and the process enhancements we made in 2019.
Prince: Concentration is a key differentiator for your firm. Why does M.D. Sass prioritize concentrated value over a more diversified approach?
Sass: When I took the helm of the equities division, the biggest material change I made was concentrating the portfolio to avoid diluting our ability to outperform. My goal was to focus on 20 to 25 stocks, predominantly mid and large-cap US equity, which fall into the value category. I believe portfolio managers should “own” their own convictions in every stock in the portfolio and not simply rent convictions from analysts. During times of market panic and extreme volatility, it’s easy for portfolio managers to lose conviction if it’s borrowed from someone else, which can lead to poor trading decisions. The best way to have a high degree of conviction is with a focused portfolio of 20 to 25 stocks via rigorous research and analysis.
We believe our primary job is to generate long-term outperformance, and that comes with concentration. Diversification for diversification’s sake simply dilutes the ability to outperform. Too many of our peers overly diversify and lack conviction in the large number of holdings that they don’t necessarily understand that well.
Many value managers also tend to build a thesis for a stock around valuation. For us, valuation is an observation, not a thesis. A thesis is built on having a forward view of earnings per share that is materially higher than consensus. We seek opportunities where we can buy this differentiated earnings stream at a reasonable valuation. Likewise, valuation is a supporting point, not the thesis. I would argue it is extremely difficult to have a high degree of conviction in an out-of-consensus view of earnings for a large number of stocks, but it is possible to build a concentrated portfolio based on that premise.
Prince: When it comes to concentration, do you place more emphasis on names or factor bets, and why?
Sass: For us, it’s not about the concentration of names, but the concentration of factor bets. We want to be sure our bets are well distributed and that we are not just making one or two factor bets, but different types of bets, which will help insulate us from big factor moves one way or another that can drive performance.
We have outperformed in both up and down markets—the 2019 bull market, the 2020 value bear market, the 2021 bull market, and the 2022 bear market. Notably, even though we employ a concentrated approach, our downside capture is near the top of our peer group. Our ability to outperform across market environments is due to our factor exposures in companies with positive earnings revisions. If you buy companies that are reasonably valued, with positive earnings revisions, you have a strategy that can work across all market environments and cycles. That’s the one factor bet I am happily exposed to. Otherwise, we need to make sure we are very well distributed in our risks.
Prince: From an organizational culture standpoint, are there other distinctions that set M.D. Sass apart from your competitors?
Sass: We have carefully and thoughtfully created an environment that is conducive to a high-performance investment team. Intellectual honesty is a very important facet of our culture. We’ve created an environment where analysts are not afraid to be wrong. Oftentimes, analysts are scared to be wrong because they fear they will be punished or embarrassed. For us, it’s important that if you’re wrong, you want to be wrong early to mitigate major losses. That’s how to outperform over the long term. But you need a culture and environment that encourages transparency and fosters an analyst’s inclination to admit when they’re wrong.
M.D. Sass has a highly collaborative company culture that encourages analysts to speak up when they have ideas. We place high importance on having open lines of communication, which allows more ideas to get shared, researched, and ultimately executed to best serve our clients’ needs.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.