The Importance of Fit

Volatility can shed light on a variety of issues investors face in the ongoing effort to manage a portfolio. One of the more underappreciated areas of neglect revealed by choppy markets is that of investor fit. Professional investors have long had their performance compared to asset class benchmarks, like the S&P 5001 or the Barclays Aggregate2. But sometimes, such comparisons come at the expense of forgetting the goals of the portfolio in the first place and whether the investments fit those objectives, which often are based more on risk mandates such as capital preservation or low volatility over certain timeframes.

A relentless focus on fit is one of the central tenets of Zeo that governs how we approach our partnership with our clients. In our case, our clients are often concerned about both volatility and liquidity, but no one is immune to either risk, especially in a steep sell-off. We believe there are ways to better approach this risk than those that have thus far accompanied the cacophony of complaints about liquidity. Active portfolio management, knowing your objectives as an investor (or those of your clients as an advisor or manager) and careful security selection based on fundamental analysis may help reduce liquidity risk in ways that may be more effective than the potentially off-target methods that dominate the conventional wisdom.

We believe owning defensive credits that are in demand by other fundamental investors is a better mitigant against liquidity risk than relying on trade frequency. Additionally, it is our experience that companies with strong credit profiles are often a source of liquidity in the form of bond buybacks in all markets. It is our view that, if one focuses on shorter timeframes to improve fundamental visibility, she can take more direct aim at the risks in her portfolio. This is the approach we take at Zeo.

In the previous quarter, the corporate bond markets were, to use the technical term, kicked in the teeth. We take pride in the muted impact of these markets on our portfolio, and we believe this is due to our focus on short durations and fundamentals. Furthermore, while our portfolio did see minor price declines in some bonds, our yield continued to deliver income that overcame those moves as intended. This enabled us to be opportunistic in declining markets – given the choice to pay yesterday’s price or try to capitalize on market weakness for the benefit of our clients, we chose the latter. We recognize that this is only possible because of our focus on fit with our investors, who have a clear understanding of our strategy and our firm. We believe this partnership with our clients puts us and them in the best position to take advantage when such opportunities present themselves again and possibly more frequently going forward.

*****

By Venk Reddy
Originally published in Q3 2015 letter


1 The S&P 500® Index is an unmanaged composite of 500 large capitalization This index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

2 The Barclays Capital U.S. Aggregate Bond Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC- registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS The U.S. Aggregate Index is a component of the U.S. Universal Index in its entirety. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Important Disclosure Information

Zeo Capital Advisors is a fundamental investment manager with a short-duration credit mutual fund, a sustainable high yield mutual fund and separately managed accounts. Venk Reddy authored this piece and is the Chief Investment Officer and founded Zeo Capital Advisors in 2009.

For more information contact Zeo directly at 415-875-5604 or visit www.zeo.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Zeo Capital Advisors, LLC (“Zeo”)), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Zeo.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Zeo is neither a law firm, nor a certified public accounting firm, and no portion of the content should be construed as legal or accounting advice.  A copy of Zeo’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.zeo.com/disclosures.

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