There are two fundamental philosophical approaches to seeking returns.
Relative returns
The majority of investment managers and advisors are seeking relative returns. A benchmark (such as the S&P500) is set, and the goal is to meet or exceed that benchmark. If the benchmark has negative returns (say down 15%) and you are down less (say 12%) then the investment is considered successful.
Absolute returns
The absolute return world does not seek to meet the performance of the typical benchmarks. Rather the attempt is to consistently have positive returns over some specified time frame. For example: 3% above the Citigroup 3 Month T-Bill.
Synthesis
We have an absolute return orientation with returns benchmarked to client objectives and risk tolerance over a five to ten year horizon. We seek to allocate assets between relative return and absolute return strategies depending on our view of the likely returns of a given asset class or strategy and the risk being assumed to achieve this return. Assets which are overvalued or for other reasons seem to entail excess risk, and likely lower returns, are de-emphasized in favor of absolute return oriented strategies, or asset classes and strategies which we feel are more attractive. Undervalued assets, or those for which other factors give us confidence, are invested to accept market risk. In particularly risky economic times we will focus more intently than usual upon attractively valued assets with strong balance sheets (quality) cash and strategies less dependent upon market direction.
Generally a set portion of the portfolio will be devoted to high quality fixed income depending on the client’s needs and objectives, though exceptional circumstances may alter that. The remainder of the portfolio is allocated amongst a range of asset classes and strategies which can include fixed income in times of increased risk, fixed income of a more speculative nature, equities, alternative assets and alternative strategies. We invest globally for this portion of portfolios across all asset classes and strategies. The goal is to both increase returns over time, and lower risk.
We also believe that there are managers who over time through active management can potentially reduce risk through a number of strategies and potentially increase returns as well. These strategies are especially useful during periods of market stress and overvaluation to provide non correlated sources of return and increase the diversification of a portfolio.