4th Quarter 2023.
Market Review
Performance Driver Review
Market Perspectives
WoodTrust Asset Management’s investment philosophy was originally established in 1971. While the philosophy and process have been refined and enhanced over time, their core principles have remained steadfast and serve as the bedrock for the way the firm manages money to this day. The cornerstone of this philosophy and process is a thorough understanding of which “bets” are the right ones to take and which are a fool’s errand.
While investing is certainly not horse racing or roulette, investors do place their money with businesses and managers in hopes that those they invest with ultimately become “winners.” This money is placed with these businesses and managers on the belief that, for one reason or another, the odds are in their favor. Correspondingly, WoodTrust believes investing is a calculated and methodical process of placing bets on the investments that are most likely to win while avoiding those that are most likely to lose or that are simply too unpredictable to warrant attention. This quarter, WoodTrust lays out bets it refuses to take, bets that improve program efficiency through cycles and bets where WoodTrust’s team has the best opportunity to add value.
Actively Mirroring Certain Market Factors
In markets, there are a few factors that can have a substantial effect on the return of an investment while also being endlessly complicated to forecast. Typically, performance surrounding these factors ebbs and flows in multi-year or even multi-decade cycles. The impossibility of pinpointing the length or magnitude of these cycles is what makes them so tough to position around. In short, determining the appropriate bet to make on these factors is incredibly difficult, and the cost of being wrong is immense. Therefore, WoodTrust actively mirrors these market factors throughout their cycles, neither betting for them nor against them.
In the equity asset class, WoodTrust deems these major factors to be style and market capitalization. Equity programs are constructed such that the breakdown of the style components of its holdings as well as the array of their market capitalizations mirror that of WoodTrust’s equity benchmark. This ensures that dramatic dispersions in performance between value and growth stocks or large and small stocks do not cause WoodTrust’s equity programs to stray dramatically from their benchmark.
In the fixed income asset class, WoodTrust finds the impactful factors to be interest rates and credit quality. Periods of rising and falling rates have huge implications for the return of fixed income portfolios. Similarly, different economic environments cause large performance differences between high-quality and low-quality bonds. Given these risks, WoodTrust builds its fixed income programs to have levels of interest rate risk and credit risk that fall within a narrow range around that of a high-quality, intermediate maturity benchmark. Therefore, both interest rate cycles and economic cycles should have a minimal effect on the performance of WoodTrust’s fixed income programs relative to their benchmark.
Boosting Efficiency
While it is important to mirror several factors across asset classes so as to not be punished for taking on unintended risk, there are other factors to which an exposure can boost program efficiency by reducing volatility. Typically, this lower volatility is created by strategic allocations to less correlated parts of an asset class.
In equities, WoodTrust creates more efficient programs through a strategic weight toward developed and emerging markets outside of the U.S. By including an exposure to these other markets, WoodTrust is able to build programs with materially lower volatility than U.S.-only portfolios.
In fixed income, efficiency is boosted through small allocations to short duration bonds, high yield bonds and global bonds; all of which are less correlated with the foundation of each program – high-quality, intermediate bonds.
Adding Value
After deciding which bets to avoid and which to moderately tilt towards, the final question stands as to which bets are the right ones to go all-in on – this is where WoodTrust seeks to add investment value through its philosophy, process and due diligence with respect to investment selection.
WoodTrust’s Investment Committee authorizes and enforces a philosophy and process surrounding security1 and manager selection that is acutely focused on durable, defensible quality and “sleep well at night” investments. This process is designed to build programs of strong individual holdings that also complement each other, creating a resilient and effective program when combined together.
It is the Research Committee’s key initiative to find the securities and managers that best fit this mold. Through constant due diligence on stocks, bonds, mutual funds and ETFs; the Research Committee maintains a thorough understanding of WoodTrust’s investable universe and what it means to be “best-in-class” in each investable vertical. Through this process, the Research Committee is able to maintain high-barrier-to-entry, low-turnover investment programs.3
In Summary
Investing requires a clear vision into where one has an edge in order to make the right bets. Just as important, is an appreciation for the bets that are difficult to get right so as to avoid them altogether. By appropriately balancing both of these concepts, WoodTrust is able to construct strong, consistent investment programs. As always, we thank you for your trust and look forward to our meetings with you in the near future.
1A “security” encompasses a wide range of investment types such as stocks, bonds and ETFs.
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