I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart. – Charlie Munger
Hughes Capital Management tailors individualized, diversified portfolios for clients based not only on the best academic evidence but also the risk capacity and tolerance of each individual client. While every client is unique, most portfolios focus on one of three objectives, or a combination thereof:
For clients with sufficiently long time horizons and high risk capacity as well as tolerance, we recommend portfolios concentrated on Capital Appreciation, meaning a focus on growing the overall assets in the portfolio. This approach is the most flexible, allowing us to pursue opportunities wherever and whenever they may arise. With this flexibility and focus on a long time horizon comes increased volatility, but following Warren Buffet’s maxim this volatility represents opportunity.
For clients who want their portfolio to generate a steady stream of income, we dedicate an appropriate portion of the portfolio to Funds and dividend paying stocks, which will usually include Regulated Investment Companies (RICs). RICs, where at least 90% of capital gains, dividends and interest are passed onto shareholders, avoid taxation at the corporate level. There are three types: Real Estate Investment Trusts (REITs) invest in real estate through properties or mortgages, Business Development Companies (BDCs) invest in the debt and/or equity of small and mid-sized businesses, and Master Limited Partnerships (MLPs) invest in natural resources, real estate and commodities.
As clients approach retirement and time horizons shorten, we typically recommend transitioning from either Capital Appreciation or Income to Capital Preservation. This means that decreasing maximum drawdown (our preferred measurement of risk) even at the cost of upside potential becomes an increasing priority. As such, we slowly transition the portfolio by reducing the allocation to funds with large maximum drawdowns to alternative Funds, and potentially even hedge, based on Trend, the part of the portfolio invested in individual stocks. This approach allows the portfolio to weather market downturns without as much of the volatility associated with either the Capital Appreciation or Income objectives.