Among other things, it oversimplifies risk to a backward-looking number; it assumes asset class correlations are constant, although history has shown otherwise; it overemphasizes asset allocation while underemphasizing manager selection in building investment portfolios.
In our view, these misguided practices serve individual investors poorly and, worse yet, produce an illusion of diversification — a false impression that one’s portfolio is well-protected from large market declines. Gresham’s thinking could not be more different. The conventional wisdom of the investment industry is designed for scale — which benefits institutions, not investors. Instead, we think about risk the way that families do, in absolute rather than relative terms, and we define risk as the permanent impairment of capital, rather than the degree to which performance deviates from a benchmark. This perspective influences every investment decision we make and often leads us down different, more rewarding paths.
Unlike traditional methods of asset allocation, our Strategic Purpose approach is designed to produce high-performing, highly resilient portfolios. Our framework focuses on the purpose of each investment strategy in the portfolio, rather than the myriad of technical and seemingly different labels that the marketplace assigns to them, which we have found simplifies the portfolio for investors and clarifies its true risk, eliminating the illusion of diversification created by traditional asset allocation approaches.
Our Strategic Purpose approach contributed to the performance and principal protection our clients experienced during the severe market declines that occurred in the bursting of the Technology Bubble (2000–2002) and the Global Financial Crisis (2007–2008). These benefits are documented by comparisons of our Gresham Client Composite performance record to broad market indices. This 20+ year performance record is available to prospective clients and their advisors upon request.
Data shows that many fund managers fail to outperform the markets. However, it has been our experience that an elite minority of active managers with extraordinary talent have the ability to add tremendous value. Gresham cultivates relationships with these managers and creates access to their limited-capacity strategies.
We have found them to be independent thinkers and experienced investors who exercise discipline with their capital base. They manage clients’ capital as if it were their own — because they’re oftentimes among the largest investors in their strategy and they may be closed to new capital, and therefore inaccessible to most investors. Like us, they seem to be motivated by intellectual curiosity and are relentless about developing countervailing investment ideas, especially ones overlooked by traditional, benchmark-oriented investors. In less efficient markets that present much greater opportunities for active strategies, we believe they can deliver truly game-changing results.
Contrary to conventional “wisdom,” our experience has demonstrated that decisions regarding manager selection can impact performance as much as or more than decisions regarding asset allocation.
Investors should not design portfolios to survive markets on average, but rather to survive every day and, most importantly, the worst days.
Gresham believes that the opportunity set for investment in U.S. businesses has declined within public equity markets while it has increased in private equity markets.