Calling Into Question Long-Held Beliefs

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Serious losses over the past two years have led investors, investment managers and commentators to ask:  How could so many of “the best and the brightest” have gone so far wrong?  Over the past several days Financial Times has run a series of articles on The Future of Investing (see ) in which they outline a number of changed attitudes and practices that have flowed from the greatest loss of portfolio value in history.

In his October 2 article on risk management, John Authers describes how risk is no longer being looked at as “beta” or “standard deviation,” traditional measures of portfolio volatility, but rather as “the risk of outright loss.”   Why beta and standard deviation were so steadfastly seen as appropriate measures of risk can perhaps be explained only by statisticians who needed a quantifiable measure of risk.  I have long contended that these concepts were flawed substitutes for an understanding of real risk – the potential for loss or of failure to take advantage of significant opportunities for gain.

As a guest lecturer in investments at the University of Notre Dame in the late 1970s I spent the better part of one lecture ridiculing the use of beta as a measure of portfolio risk.  That was before standard deviation had an appreciable industry following, or it would have been included as well.  When working with clients in developing their statements of investment objectives and policies over the past few decades, I’ve had numerous opportunities to address the question of what represents an appropriate measure of risk.  I have frequently asked members of client boards if they even knew what beta and standard deviation meant and, more relevantly, whether any of them ever used those concepts as measures of risk in their own lives.  I’m still looking for the first person to apply those concepts away from portfolio analysis.  They are, in fact, more misleading than helpful.

John Authers’ article also called into question the modern consulting approach of selecting specialists to fill numerous style boxes in investment programs that employ relatively fixed asset allocation structures.  Ironically, that practice effectively makes the consultant more responsible for portfolio success than the individual portfolio managers.  Given the relative skill sets of the two groups, that’s putting the most crucial of the investment decisions, asset allocation, in the hands of the less market-savvy group.

In former decades, when I wore a consulting hat, I was a strong advocate of finding managers with a real understanding of value, who could successfully choose among a variety of asset classes.  These were managers that typically fell into the tactical asset allocator category.  That category virtually disappeared in the late 1990s because any allocation away from equities in that period detracted from portfolio performance.  Former tactical asset allocators became closet indexers, varying allocations slightly above or below relatively fixed benchmark allocations.  With terribly unfortunate irony, tactical asset allocation became nearly extinct just as its skills were most needed when the tech stock bubble burst at the turn of the century.  The belief of consultants and their clients in a substantial permanent allocation to equities became dominant just in time to lead to massive equity losses in the two major bear markets so far in the new century.

I have been a strong believer throughout a 40 year career that the most successful managers understand well the concept of value and can find value (and balance risk) in a variety of asset classes.  It is what we at Mission and Marathon attempt to do.  We are not shy about varying allocation percentages dramatically in our attempt to protect and grow client assets.

I have long urged investors to concentrate on absolute, not relative, performance.  You can’t spend relative performance, as many learned in 2008.  Investment programs with fixed asset allocations did relatively well if they lost only 15% last year.  It was faint consolation that many similar portfolios declined from 20% to 30% over the same time period.  Our controlled risk flexible allocation portfolios (most of our clients) have always pursued absolute returns.  We succeeded in producing a positive return in each of our first 22 years through 2007.  Despite the trauma in the equity markets last year, we came into December with the potential to keep that unblemished record alive.  Unfortunately we couldn’t find enough in those last few weeks to put a plus sign in front of the full year’s results.  The average decline for that destructive year, however, was just under 1%.  We hated to lose even that small amount, but it kept our portfolios essentially whole and able to resume growth in 2009 and beyond.


Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to or call (520) 529-2900 to speak with one of the Portfolio Coordinators.