Most of this industry shift from active management to passively managed index funds and ETFs is from what I consider “high-cost passive” to “low-cost passive.” What I mean is that unfortunately, many in our industry are described by the John Maynard Keynes quote: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” They do this by marketing themselves as unconventional active managers, while very conventionally aligning their portfolio with the index they are benchmarked against.
It is time to be different. You should select funds whose holdings are often not in an index they are benchmarked against. In fact, it is good to have high “active share,” which measures the amount of overlap between a fund’s holdings and those of its benchmark. This is an academic response to the question, “Am I getting what I am paying for?”
In the heady equity environment that we have been in for at least the last five years, you might want to consider how much risk you are taking. Unfortunately, we found that investors only consider risk when they are doing a post-mortem on an investment that falls into the category I politely call “seemed like a good idea at the time!”
Investors should be on the constant lookout for good businesses at good prices, and bonds with relatively short maturity—generally less than five-years—that offer a compelling yield over and above the comparable maturity Treasury note. These company bonds should also have the free cash flow, or assets, to help repay the bonds at maturity.
Furthermore, investors should attempt to mitigate risk for the overall portfolio in several ways. First, position sizes need to be carefully managed to help make the portfolio less volatile than an equity index. Second, they need to consider the financial leverage and the potential volatility of the respective companies’ cash flows. Third, they should obtain the best interest rate spread possible with the fixed-income portion.
Mark Travis is the president, CEO and a co-founder of Intrepid Capital Management, Inc., a Jacksonville Beach, Fla.-based asset management firm, registered with the SEC. Travis is the lead portfolio manager of the Intrepid Balanced strategy and corresponding mutual fund.