Philosophy “Portfolio theory, not predictions should be the basis of any investment strategy.” - Thomas Wehlen
Modern financial theory correctly predicted the dominance of index fund performance and the superiority of long-term investing. In addition, all options pricing and stock valuation models used today are based on a large body of financial research. Most investment advisors try to beat the market through market timing and predictions, thereby disproving financial theory. Coburn Barrett refuses to make predictions and uses financial theory as the foundation for its strategy.
The GLI fund’s twenty seven year track record is evidence of the power of modern portfolio theory.
Guiding Principles
Coburn Barrett follows a long-term investment philosophy that favors holding periods of three years and beyond. Our strategies are based on the tenets listed below. While many of these are well known and widely understood, it is our position that properly applying them gives Coburn Barrett a clear advantage.
Asset allocation is the major driver of long-term returns. Selecting individual securities, and the fundamental research it requires, is not attractive on a cost benefit basis. Coburn Barrett invests in entire asset classes rather than individual securities.
Real arbitrage opportunities are too rare to be the focus of long-term investing. Relative mispricing is fleeting, and by definition temporary. Many funds already chase these few opportunities with mixed results. Coburn Barrett does not focus on arbitrage.
Portfolio theory is especially effective when applied across several asset classes. Diversification reduces risk more than it reduces returns, and the only choice an investor faces is how much risk to take. Coburn Barrett attempts to maximize diversification within, and across, asset classes.
Low turnover means higher returns. Every asset purchase or sale is a cost. Frequent market timing, directional bets, discretionary trading and regular strategy changes are unlikely to produce superior risk-adjusted returns on a sustained basis. Coburn Barrett keeps turnover low.
The risk return ratio is the only meaningful measure of investment performance. Risk is a measurable quantity; additional risk must be compensated for by additional return. Coburn Barrett measures its performance against benchmarks and securities of similar risk.
Steady risk levels strongly benefit investors. Many funds change their risk exposures significantly over time, loading investors with unwanted exposure or depriving them of opportunities for return. Even worse, traditional risk management too often ignores non-normal distributions; as a result, catastrophic losses occur. Coburn Barrett’s proprietary risk management targets a specific annualized volatility and maximizes returns at that level of risk. (The GLI Fund is targeted at the risk level of broad equity index like the S&P 500 or the MSCI World). Our extreme diversification shields investors better from disasters than traditional risk management.
High performance fees does not mean higher returns. They reward fund managers for carrying excessive risk when a bet is won, whereas when the bet is lost the investor carries the downside risk alone. Performance fees create, by definition, this asymmetry of interests between manager and investor.
Coburn Barrett does not charge performance fees. Our flat fee structure reflects our belief that the long-term risk-adjusted return to the investor is the only relevant measure of performance. In addition, it insures alignment of investors’ and managers’ interests.