We asked one of our senior portfolio managers, Mike Honkamp, about risk controls at Dana. His answer: by taking market timing out of the equation, he can focus on choosing the best stocks, quarter after quarter.
In the blog post Our Process is Our Superpower, we offered an overview of each step in our disciplined investment process. Here, we dive deeper into what we consider an important first step in building a resilient portfolio: removing market timing risk. Mike explains how we take market timing out of the equation with:
Equal weights among securities in each sector
Benchmark-driven, neutral sector positions
Avoidance of cash as an asset
Our portfolio managers are free to focus on security selection for their strategies, which is what our clients are paying us for. Makes sense, right?
The key to our risk controls is the structure we maintain in each portfolio. We remain convinced that there is no consistent way for any investment professional to time the market. So we stay sector neutral, regardless of economic conditions, because timing those conditions is impossible. Stock holdings within each sector are equally weighted as well, which means we are more likely to notice poor stock performance within sectors and industries. We don’t “chase winners,” which helps us keep human bias out of your investments.
Finally, we remain fully invested, we don’t hold cash. You hire us to run a strategy, so we use our expertise to choose the best stocks in that strategy. No need to keep any cash that needs to be backed out in order to properly measure performance.
We avoid timing the market, choosing instead a sector-neutral approach and equal-weighted position sizes. This helps us avoid overconfidence in any one sector or company and limits the risks human biases and egos could create in the portfolio. When we talk with clients, the focus is not on overweight or underweight sector choices, not on stocks on a roll, & not on heavy cash positions that need to be backed out to determine the portfolio’s true performance. Those conversations are about the stocks we’ve chosen, and that’s how we like it.