We receive many great questions during the course of each year. We welcome them, as it gives us an opportunity to educate and continuously think about how our work as portfolio managers impacts the people who benefit from our work. Here is one we received recently, along with my response to the questioner. We suspect this is a question that should be on the minds of every investor and their advisor. So you know what we think with respect to the various strategies we manage, here's the Q&A. Our website, www.emeraldassetadvisors.com, goes into much more detail if you want to dig deeper. Or, just ask us!:
QUESTION:
Over what time horizon are you looking for results, and what assumptions are involved regarding market behavior for this to happen?
ANSWER:
We generally take an 18-36 month outlook for Hybrid, though sometimes we are surprised by how fast things happen today - in that case, if we have made money faster than we thought we would, we would rather take a short-term profit than be greedy.
For Concentrated Equity, the managers we use are evaluated based on 5-year potential. The short position (Midcap Equity short) is far more dynamic, and we anticipate that the short can be bought and sold more than once a year, perhaps several times a year in a very choppy market. That is how we may add value, on top of what the managers do.
For Global Cycle, we are typically looking 10 years out, on average. This strategy is for the money people will not need for perhaps a half a generation or longer. For instance, China and India, which are two of the core themes of Global Cycle, are currently regarded as "emerging markets." Our belief is that in 20 years, they will simply be known as "markets" as they will have developed. However, some of the themes we invest in for Global Cycle will evolve faster, over 2 years, 3 year, 5 years, etc.
With many holdings in all three of our strategies, we expect to hold them at some level over many, many years, but the position size will be adjusted as a medium-term risk measure. By contrast, the hedge positions are used primarily as a way to try to make money on short-medium term declines in areas of the market that are similar in content to our holdings. Our goal is to profit from the short positions. However, as a fallback, they may act as a hedge against the existing portfolio, hopefully allowing us to hold the core positions longer without experiencing all of the downs, and promoting long-term capital gains over short-term gains.
While Hybrid is broadly diversified amongst 10 different sub-categories of funds (as we define them), each with its own method offsetting market risk, the Cycle and Concentrated Equity strategies are effectively two portfolios in one:
The core "long" portfolio A temporary short position (purchased by buying an ETF or mutual fund that shorts)
Our primary goal is to make money on the shorts in the shorter time frame we own them, and make money on the core-long positions over the longer time that we own those. Of course, we may not always achieve that objective, but that's what we are aiming for.
Market behavior is something we feel we cannot outright predict. What we hope to do, however, is gauge risk and reward at a particular point in time. That is what our technical analysis helps us do, and that's why we recently added one of the most noted technicians in the U.S., Michael Kahn, to our investment team.
Our "best guess" is that stocks around the world will do no better than break even for the next 3-5 years, and that bonds will not provide positive returns either, as rates finally go up in earnest. But rather than stake everything on that vague forecast for the broad market, we look for bull markets in all corners of the investment universe, as long as we can access them through a daily-liquid vehicle (mutual fund or ETF). And, even if markets go nowhere cumulatively for the next several years, we are quite confident there will be furious rallies and declines in many segments.*
In the spirit of the widely-watched CNBC host Larry Kudlow, we at Emerald believe that the "best path to prosperity" is a portfolio management strategy that is FLEXIBLE enough to navigate a wide variety of market conditions, and has the ability to be ADAPTIVE to major changes in market conditions over time. The Emerald Allocation Strategies, as we call them, developed out of a concern we had years ago that there are gaps in the traditional investment offerings that needed to be filled (we think we have filled them), and that hedge funds are not for everyone, even if you can afford them. That's our story. We are definitely sticking to it.
* Remember, a secular bear market (we think we are in one for stocks, and for bonds its just around the corner) is not a market that's fallen and can't get up, its a market that falls, gets up, falls again, gets up again, but can't take many steps forward when it is up. Translation - up and down numerous times, with the long-term result being a long, period in which cumulative returns are flat. For example, the S&P 500 first reached 1400 in late 1999. As of 5/29/08, the closing value was about 1398.
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