Season Investments

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The Virtues Of Raw Cauliflower

Posted on September 20, 2016

“A good portfolio is constructed in the same manner in which a good chef prepares a meal.” – Cliff Stanton, 361 Capital

We were in Denver all day yesterday at the annual Inside Alternatives conference put on by Financial Advisor magazine. In addition to catching up with many of our industry connections at firms like Lending Club, Direct Lending and 361 Capital, we were privileged to hear talks from the likes of Dennis Gartman, David Rosenberg and Mark Yusko. We also spent hours talking with analysts and portfolio managers representing a wide variety of unique investment offerings.

We attend this conference every year as a way to refresh ourselves on what is available in the alternatives space as well as to expose ourselves to a host of new ideas, concepts and economic projections. Many of the managers we allocate to in our “Alpha Strategies” bucket have been identified at this conference over the years.

In lieu of our regular post, this week’s Insight is an excerpt from a recent publication by 361 Capital regarding year-to-date performance, diversification and how portfolios are constructed. We especially like the analogy comparing portfolio construction to a chef preparing a meal, and we believe alternative investments are a key ingredient for helping our clients achieve their long-term objectives. Enjoy!


Excerpt from 361 Capital’s monthly Alternatives Briefing…

2016-09-20_cauliflower.jpgThrough mid-September the classic 60/40 portfolio has produced a return of 5.5%, with the S&P 500 Index up 5.7% and the Barclays Aggregate Bond Index advancing by 5.2%. The holders of the roughly $12-$14 trillion in negative yielding government bonds are starting to get worried, and equity markets are playing chicken with the Fed, rewarding the certainty of support (read, “rallying on bad economic data”) and punishing the uncertainty of progress (read, “falling on good economic data”). Advisors who we’ve been speaking to have noted that this is one of the most difficult times in their careers, as keeping up with the Dow Joneses is increasingly uncomfortable; but defending risk mitigating and truly diversifying strategies has become a thankless task each quarter when they sit down with Mr. & Mrs. Smith.

In this regard, we think our industry has created its own problem. Having worked with hundreds of financial advisors over our collective careers, we’ve observed that the way in which quarterly performance reports are constructed often times ensures an unproductive conversation that puts advisors on the defensive. These quarterly conversations should be focused entirely on the clients’ goals and the objective progress toward achieving those goals. But instead, most reports that we’ve seen contain elaborate analyses of each fund, ETF or separate account manager in isolation. In addition, frequently there is some sort of report card that provides a summary of which managers are outperforming or underperforming on various measures, and the conversation then turns to what led to Manager A’s outperformance and Manager B’s underperformance over the last 3 months, a time frame that has absolutely no explanatory power whatsoever about the efficacy of a manager’s approach.

The result of this granular focus is unnecessary turnover. We are all biased to act, and so managers with too many red boxes are fired, likely at a point when the strategy is simply out of favor rather than being “broken,” and new funds or ETFs are purchased, which invariably have done well recently; performance that new clients in the funds will not experience.

But if the client’s goals in terms of wealth accumulation or preservation are being met, and the total portfolio’s risk metrics are in line with stated preferences, then the total portfolio is doing exactly what it was built to do. There will always be a component of any portfolio that is underperforming, but that doesn’t necessarily mean it should be replaced.

A good portfolio is constructed in the same manner in which a good chef prepares a meal. The components are selected not for their individual merits alone, but for how they complement each other in order to achieve something truly rewarding. So the pertinent question is, what meal will sate the client’s hunger? If you’re serving what the client ordered, then you’re doing your job; let them know that, and avoid debating the virtues of raw cauliflower.


david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.


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Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.