Purchasing a good asset at a good price is an ideal investment proposition.
Purchasing a good asset at a bad price can be an investment that works out over time.
Purchasing a bad asset at any price tends to destroy one’s capital.
These three statements seem to be some simple rules to invest by – buy good assets, stay away from bad ones and get the best price possible. How hard can this be? Every purchase decision requires the investment team to assess both the quality of the asset and the proper price to be paid for that asset. Ballast spends time on this every day.
In today’s capital markets, it seems (actually it is more of a reality) that a lot of capital acquires assets without paying much attention to either the price being paid or the quality of asset being acquired. Approximately 30% of money gets invested into the capital markets via a passive/allocation investment process. Think of 401(k) contributions where RIAs method is to ‘asset allocate’ people into a model portfolio or some other passive investing strategy. If you are in an ‘asset allocation’ you effectively are buying large swaths of assets regardless of the underlying value of those assets nor any assessment of the value of those assets. However, you are merely betting that (in aggregate) the group of underlying assets will achieve returns and perhaps (more accurately) the correlations of returns that repeat themselves.
An example of someone acquiring an asset whose underlying value has nothing to do with your personal investment objective is the Japanese 10 year bond. This bond yields a negative 0.54%, which means you pay Japan 54 bps per year to hold your money for 10 years. Ballast expects to be paid for others to use your money – not the other way around. However, if your fixed income allocation is one of the Blackrock, PIMCO, Janus or American bond funds, you own something you wouldn’t likely own if you were more thoughtful.
These are the top holders of a Japanese bond that has a negative yield to it. Some of the more widely known fund manager names are Blackrock #2, PIMCO #3, Janus #14, and American Funds #18. Our point is when you own funds, you often own securities that you would never buy for yourself (since in this particular case we would not pay Japan 50 bps of yield per year to hold our money) and we don’t think you should either.
This leaves a lot of questions in our mind. What if history doesn’t repeat itself? What if my starting point along that timeline is the wrong point in time? Is my investment objective then really just a function of broad asset classes? In our humble but firm opinion, these questions are valid. Our answers to these questions suggest that acquiring an asset (security selection) and building a portfolio (institutional investing) is more intellectually thoughtful – and time intensive – than a simple mathematical model.
At Ballast, we focus on not only acquiring assets, but also managing them. It means taking the time to analyze both the quality and the price of the asset itself. That is our method.