Investment Philosophy: We Focus on What Matters

Salient’s single- and multi-asset alternative and real asset investment strategies serve as powerful building blocks for efficient portfolios. We describe a strategy’s impact on a portfolio with the following characteristics:

When developing strategies, we adhere to our core investment philosophy that broader portfolio diversification decreases risk and increases return. This belief is agnostic to market returns and predictions, and instead centers on five things that matter:

How much risk you take matters

We think investors and advisors make two mistakes with risk.  First, they tend to underestimate both the theoretical amount of risk required to achieve their investment goals as well as the actual amount of risk achieved in their portfolios.  Second, even the few who take the right amount of risk may experience unnecessarily wild swings in risk over time because they are targeting dollar exposures instead of risk exposures.

Which risk you take matters

While investors are usually familiar with the value of diversification, their portfolios usually don’t reflect it.  By and large, investors are taking equity market risks and not much else.

Human behavior matters

Every investor either pays or collects a tax on behavior.  Good investors are process-driven in their own portfolios, and they collect a tax from other investors by understanding herd and momentum tendencies, biases toward familiarity (for example, favoring US equities over emerging markets), biases toward growth and other factors, and the fact that for long periods, market prices and returns can be determined by the perceptions and game-playing of market participants rather than economic fundamentals.

Costs matter

Most investors have begun to understand the impact of fees but often underestimate the importance of trading costs and taxes, which can dwarf explicit fees in particularly inefficient strategies.

Market structure and information matter

Most investors drastically overestimate the value to be found in analyzing and selecting individual securities.  Active management can matter when: (1) you are measured against passive instruments and market indices that are flawed, (2) you have a clear informational advantage, or (3) you have a structural advantage (e.g. long term horizon, willingness to be illiquid, willingness to take risks others are restricted from taking) that you can exploit.