{"id":43639,"date":"2015-07-23T01:12:48","date_gmt":"2015-07-22T23:12:48","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/real-money-real-risk\/"},"modified":"2019-12-30T23:50:54","modified_gmt":"2019-12-30T22:50:54","slug":"real-money-real-risk","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/real-money-real-risk\/","title":{"rendered":"Real money, real risk"},"content":{"rendered":"

In reviewing the primary options available for investment \u2013 stocks, bonds and cash \u2013
\nnoticing that each has its problems is unfortunately the easy part of the analysis. Stock P\/E
\nratios have expanded dramatically over the past six years, reaching levels unseen for quite
\nsome time and exposing investors to any reversal in underlying confidence. Bond yields
\nhave fallen to extraordinarily low levels in nominal terms, thus presenting investors with the
\npossibility of negative real returns should inflation or credit quality prove problematic down
\nthe line. Cash returns nothing today \u2013 as discussed in a prior Outlook \u2013 and similar to
\nbonds, holds the prospect of lagging inflation over time. There is also real estate, which for
\nmany investors means their house. While home prices may not be out of line with long-term
\nhistorical valuation parameters, most homeowners have learned the lesson that house
\nprices can in fact decline, so yes, there is risk in this asset class too. In total, it seems the
\ninvestment landscape today holds plenty of risk. <\/p>\n

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Beyond the bedrock approach of buying cheap assets, diversification can be of great
\nassistance in building a strong portfolio, one with ample expected return but not too much
\nrisk. In theory, when one asset price zigs, another may zag. By combining assets with
\ndiffering return and risk profiles, the characteristics of a portfolio may be superior to its
\nindividual components.
\nIn practice today, however, the yield on a traditional 60\/40 stock
\nand bond portfolio is at a 100+ year low. Both asset classes are expensive, leaving an investor little to work with in the way of portfolio building blocks. Worse yet is the uncomfortable possibility that the correlation between stocks and bonds may become high should the mood of the markets darken, and thus mute the potential benefits of diversification.<\/quote><\/p>\n

In the realm of equities \u2013 our focus at Perkins \u2013 risk can sneak up on you, in a way. In a
\nbullish environment, an investor may assess her portfolio as consisting of a
\npharmaceutical company with a potential blockbuster in the pipeline, a cable television
\noperator which may participate in a merger boom, and a world-class industrial
\nmanufacturer focused on efficiency gains to drive its margins higher. In a less optimistic
\nsetting, the same investor may feel she owns a drug company facing pricing pressure, an
\nold media provider grappling with cord-cutting, and a cyclical industrial firm earning peak
\nmargins with nowhere to go but lower. Further, it is when in this more pessimistic mood
\nthat she will recognize that in addition to a number of serious company-specific or
\nperhaps industry-level risks embedded in the portfolio, the correlation among these risks
\nis frighteningly high. For example, the drug pipeline optimism seems to fade at the same
\ntime as media M&A activity declines and industrial production rolls over. <\/p>\n

The seemingly
\nnatural tendency to recognize risk here, risk there, risk everywhere in a stock portfolio \u2013
\nduring and after a sizable drawdown in the market \u2013 is something to avoid at all costs.
\nOne must try to recognize and avoid\/manage the risks in advance.<\/quote><\/p>\n

As our benchmarks keep setting new highs, our investment team keeps an account of the
\nrisks which are accruing. Our analysts model an explicit downside scenario for every
\nstock under consideration. This discipline helps us identify risks, even during a bullish
\nphase in the market. <\/p>\n

We are especially leery of cyclically high sales and profit margins, as
\nwell as valuation multiples stretched by the demand for dividend yield. Conversely, we like
\ncompanies which may benefit from \u201cself help,\u201d such as lowering operating expenses or
\nrefinancing high-cost debt. We also favor earnings streams which are tied to repeat
\npurchases unlikely to change as a result of fluctuations in the economy, as we believe
\nthese stocks are relatively less likely to be subject to a weakening of market confidence.<\/quote><\/p>\n

Our portfolio managers are aiming for a thoughtful degree of diversification, not just in
\nsector classification or geographic region but by underlying drivers of the cash flows, book
\nvalues and valuations of our holdings. We are always on the lookout for that which is out
\nof favor and unloved \u2013 even today there are examples of this \u201cmeat and potatoes\u201d of
\nvalue investing \u2013 and in its absence hold quality in high regard.