Simpson Capital Management (SCM) provides investment management and consulting services for personal and institutional client portfolios. An investment philosophy is a coherent way of thinking about markets, how they work and the types of mistakes which consistently underlie investor behavior. The investment philosophy used to implement these services for you has been developed over the three decades of our founder/CEO’s career.
Capital markets are markets for buying and selling equity and debt instruments. They include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities. They are modestly efficient in the way new public information is processed but not perfectly rational.
SCM believes there are inefficiencies in the short-term which can be exploited for you and in the long-term the market eventually embraces reality and gets it right. Below is a discussion of how SCM integrates these characteristics in managing your portfolio.
Humans and Markets Aren’t Perfect
In many life decisions, we don’t always make the best choice. We either don’t have all the facts, hold pre-deposed biases or don’t prioritize the critical factors. Buy/hold decisions in capital markets are no different.
The challenge is to compile and analyze known facts, account for the randomness of new information being revealed to its participants and assess the rationality of the market’s collective actions. SCM approaches this challenge by gathering data from a variety of sources and observing the economic/political environment. Once the data is compiled and analyzed, SCM forms an opinion on where the herd is headed in the short-term or tactical basis.
There are roughly six times a year when the market makes irrational dips and spikes, usually triggered by outside events such as 9-11 or the Brexit vote. SCM uses these events to go against the grain to pick up extra return. At these tactical moments, SCM rebalances the portfolio taking contrarian action by buying on the dips and selling into rallies. Visit our Research page to learn about SCM’s capabilities or our SCM Market Journal blog to learn where the herd is headed next.
The Market is Driven by Fundamentals in the Long-term
It is not possible to successfully ‘time the market’ over the long-term. The markets sort out the excesses and become rational once the facts are known and widely held. Therefore, SCM has developed strategic asset allocation models using empirical data and matches the risk/return profiles of these models to your profile. SCM’s portfolios are fully invested at all times and the target allocations only change when your needs change.
Factors outside the portfolio such as market action and portfolio additions/distributions often cause deviations of your actual allocations versus your long-term target allocations. Your portfolio is re-balanced to narrow the gaps when the deviations exceed our predetermined tolerances. This ensures buying low and selling high. Visit our Portfolio Strategies page to learn more about these models.
Quality Issue Selection Transfers Theory into Practice
SCM uses a macroeconomic or ‘top down’ approach to making your individual security selections. The firm prepares forecasts of the future market environment and employs a proprietary security valuation model based on price, forward looking consensus analyst estimates and long-term growth rates. Your security selections are structured with a ‘buy and hold’ objective.
With a growth at a reasonable price (versus value) approach, equities are selected based on management quality, expected market growth and market leadership. Emphasis is placed on mid-cap companies for return and large-cap companies for stability. Portfolios are also structured relative to S&P500 index industrial sector weights. Lesser positions of small-cap and international issues are also held.
Fixed income securities including money market instruments are selected relative to your needs based on credit quality and interest rate sensitivity. Bonds are structured based on type, volatility (duration), maturity and payment cycle.
The fundamentals used to make your initial security decisions may change over time. The rationale for holding each security in your portfolio is constantly reassessed. When the outlook for a security outside your portfolio is brighter than your existing holding’s outlook, a trade is made.
SCM uses the short and long-term characteristics of capital markets to develop a reasoned approach for you. Visit Our Services section to learn more about how Simpson Capital can identify your needs and apply our investment philosophy to your investment portfolio.
