Sometimes I pine for the good old days at Pinnacle when the prime ingredient for measuring investor success was patience. Back in the day when we were strategic buy and hold investors, the returns of the asset classes that we owned in our portfolio were assumed to be a given, as long as we waited long enough for them to appear. Since the underlying theory suggested that markets were always efficiently priced, and since our clients agreed that returns could and should only be measured over the “long-term,” we could asset allocate our portfolios based on past returns. With the backing of the financial media and virtually all of our industry pundits and thought leaders, everyone involved agreed that patience was the key to success.
Times have certainly changed for the Pinnacle investment team (Truth be told, in the old days we didn’t have a Pinnacle investment team because there wasn’t a need for one!). Today we actively manage portfolios to take advantage of changes in asset class valuations, changes in the market cycle, and changes in market internals such as investor sentiment. The challenge of this strategy is that in today’s markets the data comes fast and furious and the financial markets can be influenced by the news in unforeseen and unpredictable ways. The inevitable result of such fluid market conditions is that the holding period for securities in the portfolio continues to shrink. Where we used to hope to hold equity positions for periods of years, we now would be happily surprised if that were the case. The market rally since March 9th is a good case in point. As the markets have violently rotated from defensives to early cyclicals to late cyclicals, investors who were not nimble enough to follow the cycle missed out on excellent opportunities for excess returns.
Last week, our portfolio manager for our Dynamic Ultra Appreciation portfolios, Rick Vollaro, put on a trade to possibly take advantage of what we perceive to be the short-term overbought condition of the market. He sold a position in an exchange trade fund that owns the Materials sector and bought a 2x inverse position in the same sector, effectively reducing our equity exposure in that portfolio by 10%. He intends to take the trade off as soon as we get the correction that he is anticipating. The good news for me is that Pinnacle has the expertise and the technology in order to execute such an innovative transaction with ease. However, I can’t help but smile at the gigantic changes that have occurred in our portfolio management philosophy over the past 7 years. We wouldn’t have considered this trade, even in our most aggressive portfolios, as little as two years ago. Today we consider these kinds of transactions to be a reasonable and necessary part of our risk management process and an integral ingredient in our quest for excess returns in difficult markets. We’ve come a very long way from patience being the primary strategy we rely on to earn expected returns for our clients.
