At SGI fundamental beliefs help guide our approach to investment management. Four key pillars include:
1. Equity risk does not carry a risk premium. Those who take on risk expect to be paid for doing so. This market efficiency holds across asset classes very well. Yet in the equity markets it remains elusive. While it is self-evident that some stocks are riskier than others, we believe there is not a broad-based equity risk premium. We believe that through rigorous quantitative and fundamental analysis we can identify equities that demonstrate better risk return trade-offs, offering better upside potential while mitigating and minimizing the downside.
2. Equity risk is actual, not relative. We believe that defining risk by the volatility and return of a portfolio is superior to defining risk as variation from a benchmark as found in an explicit or implicit Information Ratio. As such we view our Low Volatility strategy as a more conservative, consistent and capital preserving approach than cap-weighted benchmark-sensitive investment strategies. We believe one should focus on risk, not tracking error or the information ratio.
3. Low volatility equities are not necessarily value, large-cap and/or high dividend yielding names. We believe individual companies vary in risk. As such, the manner in which a portfolio is constructed should focus on managing the entire risk of the portfolio rather than exposures to growth, value, etc. Our managed-risk approach to equity investing will vary within these exposures over time based on market conditions, economic conditions and market cycles.
4. We believe that prudent portfolio management seeks to maximize the upside potential of a portfolio through minimizing downside risk. This is subtle; experiencing a more volatile pattern of returns will cause a lower compounded result.* The point is that it’s very hard to recover from large losses. We believe that minimizing downside equity risk is superior to finding the next ‘lottery’ stock. Creating a portfolio with more consistent, transparent downside protection while still capturing the upside is what our Optimized Low Volatility Equity strategy seeks to do.