October 31rst marked the ten-year anniversary of Pinnacle’s Global Investment Performance Standards (GIPS) compliant track record. That’s a big deal in the institutional investment community — it means that we’ve met the GIPS standard for reporting performance (often required by institutional investors). It also means that we have a legitimate ten-year track record, which is a long time in the investment business. If nothing else, we can show investors our performance over several different market cycles, which is a very useful way to evaluate a firm’s investment process. Importantly, we also have the same investment team today that we had a decade ago. After all, what good is a ten-year track record if the analysts who are responsible for the past returns are no longer at the firm?
Of course, this doesn’t mean that Pinnacle has only been managing money for ten years. In fact, we have been in business since 1993. But the company was much smaller then and the principals of the firm tended to invest each client portfolio on an individual basis — a methodology that has the benefit of customization and the downside of being completely unmanageable for a firm that was growing as fast as we were (and are). Our strategy of portfolio diversification worked wonders when the dot com bubble burst in 2000 – 2002 and thankfully small-cap funds, value-oriented funds and stocks, and fixed income, managed to outperform the S&P 500 as it dropped in value by 49%. However, it was clear to us by the late 1990’s that the traditional methods of Buy and Hold investing were obsolete, and so we instituted a major shift in portfolio philosophy and strategy.
Changing to an active asset allocation strategy was not easy. It required creating model portfolios for our clients, and asking long-time clients to sell securities that we had owned for years (often with the added expense of realizing long-term capital gains). It also meant we had to build an internal investment team, with the full-time job of following the markets. Changing to tactical asset allocation required us to establish a budget for independent investment research, and we needed to acquire specialized software that would allow us to execute trades across all models and all client accounts. All of this was unheard of for a wealth management firm at the time.
The fact is, we were dismissed as screwballs by many of our associates in the planning community. These days, our Chief Investment Strategist Rick Vollaro and I are asked to fly around the country to train people in tactical investing. Times have certainly changed.
Onward and Upward
Today almost everything we do in the investment team has been upgraded. We have tripled our budget for independent research and have a much more sophisticated methodology for integrating a huge amount of investment information into our own market outlook. We have both internal and external quantitative models to help us better understand portfolio performance and volatility, and how the markets might behave over the next six months.
We have also grown in our ability to describe exactly what we do. Ten years ago I didn’t know how to explain to clients — or to other institutional investment colleagues — that Pinnacle was a “go anywhere” management firm that had a relative “risk budget” for making asset allocation changes based on our shifting view of market opportunities. Instead we called ourselves “tactical asset allocators” and hoped people knew what that meant. Indeed, the language of active management is slowly becoming clearer to investors and the media, and I believe Pinnacle is responsible for some of that (it was one of the goals of my 2009 book, Buy and Hold is Dead (AGAIN): The Case for Active Portfolio Management in Dangerous Markets).
Over the past decade we have managed to outperform in a five-year bull market that began in October 2002 and ended exactly five years later in October 2007. We have outperformed in the great bear market from October 2007 to March 2009. And we have generally under-performed the bull market from March 2009 to the present (while taking far less risk than our benchmarks) as we have worked to better understand the structural risks embedded in the post-Lehman financial markets. Throughout this time we have refined our investment process to move with the changes in the financial world.
We will continue to apply our combined talents to earn excess returns for our clients where possible, and to systematically manage risk at all times. And so Happy Anniversary to Pinnacle’s investment team and to our valued clients and friends. It has been quite a decade. Let’s raise a glass to the next ten years… and the next secular bull market.