INVESTMENT APPROACH

BCM's investment approach can be categorized as "global macro" or "global tactical asset allocation." These are broad categories that include different investing styles, but they share a common theme that is relevant to BCM's approach. An overview of this is provided below.

MACRO BACKGROUND

BCM's approach began developing in the early 2000s during which time (and since) financial markets have experienced significant changes.

For example, in 2019 investment research firm Morningstar found nearly half of the US equity market's value had become associated with indexed-related investments. This reflects a structural change where investors are increasingly buying and selling groups of securities based on market indices instead of single securities based on individual companies (e.g. trading whole markets instead of single stocks).  

In addition, transactions can now be made in real-time with a tap of a mobile device, and trades are executed instantly by algorithms for "free." Not only were these circumstances impossible in the past, but they also enable modern investors to act (and overreact) on fear, greed, and speculation like never before.

 

This results in more irrational and volatile market behavior than history and academic theory assume. Market data support this observation. For example, the chart below shows the daily price volatility of returns for the Dow Jones Industrial Average from 1960 to 2019 by decade.

DJVol20201008.png

DJIA volatility of daily price returns by decade.

Jan. 1, 1960 to Dec. 31, 2019.

Source: S&P Dow Jones Indices, BCM

Volatility more than doubled from 1960 to 2019. It is no coincidence the rise coincided with some of the most significant modern developments in financial technology and innovation. For example, the first index fund was introduced in the 1970s, and internet trading was introduced in the 1990s. 

The point is modern financial markets barely resemble those of decades past, circumstances have changed. BCM's investment approach was developed from those changes and designed to capitalize on the market-level opportunities they create.

MACRO MATTERS

BCM's approach focuses its investment decisions at the market (or macro) level. This contrasts with how traditional active managers make decisions at the company level, like "buy Apple or Google." BCM does not consider individual companies and instead focuses on entire markets, as represented by market indices like the Russell 2000 or Nikkei 225.

One important reason for this macro approach is most public investment returns can be explained at the market level over time. To be clear, this statement does not apply to private investments like venture-backed start-ups or private M&A deals. However, in large, liquid, publicly traded markets (like for US large-cap stocks) most returns can be explained at the market level over time. 

This concept is well-supported by empirical, Nobel Prize-winning research and is considered one of the most important findings in modern finance. Some of the seminal studies on the topic include the following. 

  • Markowitz, H. (1952). Portfolio Selection. The Journal of Finance 7(1), pp. 77-91.  

  • Sharpe, W. (1966). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance 19(3), pp. 425-442.

  • Brinson, G., Hood, L., Beebower, G. (1995). Determinants of Portfolio Performance. Financial Analysts Journal 51(1), pp. 133-138.

Research aside, simple market history demonstrates this concept in the real world. For example, in the late 1990s most US stock investors experienced gains regardless of which stocks they owned due to a tech boom. However, by the early 2000s most stock investors experienced losses as the boom went bust. The same can be said of 2006 versus 2008 (financial boom-bust), or essentially any market cycle throughout history. 

S&P 500 ANNUAL RETURNS

Markets20210203.png

 Year over year price % change 1929 to 7/2020.

Source: S&P Dow Jones Indices, BCM

The point is the stock market explains most stock returns, not the other way around. To be fair, that does not mean we cannot pick stocks that will "beat the market," many investors have done so.  However, the right question to ask is can that be done consistently to beat a relevant benchmark on a risk-adjusted basis net of costs? The honest answer for most is simply "no." 

The ugly truth about "stock-picking" is some picks are right, some picks are wrong, and over time they average out. The irony is the average is essentially what the market is (i.e. the market return = the average return of all stocks good and bad). One way or another the market still ends up explaining returns over time.

After recognizing this simple truth it makes sense to focus investment decisions at the market level. That is where most returns can be explained and where decisions can have the greatest portfolio impact. (Note, "the stock market" has been used for simplicity, but the same logic applies to other markets and asset classes).   

THE BOTTOM LINE

The advantages of using a macro approach are well-supported by market history, academic research, and industry practice. Furthermore, the case for using a macro approach becomes even more compelling due to the modern market dynamics described above.

BCM leverages decades of experience and expertise to provide proprietary, actively managed global macro strategies designed to thrive in today's markets.

 

This was only a summary overview of one general concept relevant to BCM's approach. Please contact BCM for more detailed information about specific investment strategies. 

 

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