Market Philosophy

Our market philosophy is inspired by independent investment research, and dedicated to capital markets analysis.

Successful investing is accomplished only with discipline and a rigorous dedication to independent investment and economic research. Our dedication to the discipline of capital markets analysis brings performance over time—even in a volatile market.

At Alfstad Capital our disciplines, policies and practices are continually evolving. Our market philosophy incorporates new analytical methodologies and adapts to ever-changing economic realities. Our investment decisions are time-tested, respected and have frequently delivered successful positive returns over the last decade. As with all investments, returns are historical and past performance is no guarantee of future results.

Our commitment to Total Return rather than Yield Seeking or Option Adjusted Spread buying practices is central to our performance, and successful investing. Observing economic trends over the years gives us the judgement to balance of ratios of instruments within the aggregated portfolio.

Capital Markets Overview

The capital markets are broken down into two primary forms of securitization; the fixed-income (bond) markets and the equity (stock) markets. With thirty years of investment experience as specialists in the institutional fixed income sector, our capital market knowledge and philosophy is formidable and we hold an enviable tenure in a complex and risk-bearing time. Gone are the days of a relatively closed US market that focused only upon the domestic variables and conditions. Today, the US bond markets are the global markets and the global economy is the US economy.

The fundamental tenets of the marketplace will never change:

  • The needs of portfolio managers to put capital to work
  • The need to recognize and manage the risks inherent in investing
  • The need to effectively fulfill each portfolios’ unique and critical fiduciary responsibility

Risks vs. Reward Overview

As portfolio managers sought returns beyond the norm over the last four decades, new structures, paradigms, and products such as CMOs, CDOs, ABSs, mezzanine debt, range notes, and non-inversion notes have entered the fixed income marketplace. These structured derivative products have required a very sophisticated analysis of possible scenarios and mean probabilities plus a supportive status quo.

Successful investing also requires an advanced sense of market knowledge, philosophy, and comfort. A market can have depth, breadth, and flow one day. In a heartbeat, that can, will, and does change. Positions that were valuable can become illiquid. Commensurately we see their market value evaporate. We can probably all name companies—boasting in some cases, Nobel Prize winners—who got so caught up in sophistication they lost sight of common sense and basic market realities. A painful collapse in 2008 has shown once again that sophistication is no protection from hubris.

Errors in this investing sector come from several sources:

  • Misunderstanding the risks, such as credit risk, liquidity, and inflation
  • Overestimating the actual probability of the desired return
  • Unachievable expectations for positive performance because of naïve market philosophy and lack of economic insight

A scenario analysis for a security or an aggregated portfolio needs more than just a range of possible outcomes; it needs a grounded, experience-driven expectation of the most likely outcome. We feel portfolio performance is best targeted by the careful selection of individual positions whose future performance will optimally target the most likely interest rate scenario over a desired holding period.

We focus on the fixed income side of the asset spectrum.

Understanding the interplay between the risk of owning any security and the range of possible returns is a simple yet profoundly critical concept in managing a bond portfolio. Understanding where risks via “sophistication” outweigh reward probabilities is another. We find the most accurate information and analysis of investments under consideration and the most likely behavior of rates over the considered time period. This allows us to bring to our clients the best informed and most accurate data upon which solid decisions can be made.

Structured products are complex, illiquid investments whose returns may be based on the underlying price movements of a single security, a basket of securities, an index, a commodity, a debt issuance, and/or a foreign currency. Many economic and market factors will affect the value of structured products and such factors may offset or magnify each other. Risk factors may include interest rate levels, implied volatility and time remaining to maturity. Other risks may apply. Please carefully review the disclosure document or offering memorandum before investing.

Comments are closed.