Stratus believes that building an investment strategy that targets a specific return is an inappropriate way to reach investment goals because it sets an unrealistic psychological bias against which all future performance is anchored. Further, targeting future returns can be a frustrating and fruitless process. Conversely, our risk management philosophy is built on targeting a client-specific risk profile and then building an asset allocation and rebalance strategy that aims to match this unique risk profile.
Our first step with a prospective client is to have that client fill out an Investment Policy Questionnaire (IPQ). This document asks the client to describe their investment goal(s), their ability and willingness to take risk and their familiarity with the financial markets. By having investors think through the reasons they invest, how much risk they are comfortable with and their level of investment knowledge, Stratus aims to create the framework for an open discussion that will help both the prospect and our firm decide if we can be solid strategic partners.
When a prospect becomes a client we use their IPQ to create a first draft of a client-specific Investment Policy Statement (IPS). The IPS is the basis for all portfolio construction and risk management decisions. We take this draft and together we finalize the client’s risk profile so we can then decide on which asset classes to include in the portfolio, which securities we will use to target these asset classes and how we will rebalance the portfolio to make sure the client is not taking more or less risk than desired.
Risk management does not stop with the IPS but is an ongoing process. Stratus continually monitors each client’s asset allocation in relation to their target allocation and rebalance range. When any allocation breaks a tolerance limit we then contact the client to discuss the best way to either increase or decrease the asset class and portfolio risk.
At Stratus, our entire investment process is built around managing the specific risks our clients are willing and able to take. Our goal is to make sure that our clients are only taking risks for which they will be rewarded through consistent and disciplined exposure to asset classes that have higher expected returns while limiting unnecessary portfolio volatility. We believe that market regimes change over time and that returns follow random-dependent paths. Therefore, investors who have a disciplined investment process are more likely to emerge from market turmoil stronger, more experienced and better prepared.