Investment Philosophy

At Prism Capital we take a disciplined, measured approach to investment management. Our investment process is focused on diversification, fundamental valuation and the prudent management of risk. Underlying this process is our investment philosophy – our primary beliefs regarding the functioning of the capital markets and the drivers of long-term investment returns.

Asset prices can and do stray from fundamental values, often significantly and for long periods of time. Successful long-term investing demands we recognize this, and maintain the patience and discipline to act accordingly. Asset allocation is the most important component of the investment process, and a fundamental valuation of the asset classes under consideration should provide the backdrop to this process. In the end, a diversified portfolio, relying heavily on low-cost, passive investments to implement the allocation, should form the core of most investment strategies.

Value refers to the fundamental, underlying investment worth of an asset. The price paid for an asset relative to its value goes a long way in determining future return. While this may seem straightforward, many advisors recommend static asset allocations that ignore this relationship. Incorporating fundamental valuation into the asset allocation process is essential for effective risk management and enhancement of long-term investment returns.

Asset allocation - the relative amounts invested in broad asset classes such as stocks, bonds, and real estate - is the primary determinant of long-term investment return. Overall portfolio returns are much more dependent on the amounts invested in each asset class than to any particular style, manager, or security selections within these classes. To maximize the benefits of diversification and the allocation process, the asset allocation study should consider a broad range of asset classes.

Diversification is widely regarded as a key component in the prudent management of investment risk, but risk reduction is only half the story. When combined with a systematic program of periodic rebalancing, diversification enhances compound, risk-adjusted long-term returns. The whole is greater than the sum of its parts. This diversification is achieved through the asset allocation process.

Investment Costs can have a dramatic impact on realized long-term returns. Index funds and ETFs provide pure exposure to many asset classes at minimal cost, and should form the core of most investment strategies. The costs of actively-managed funds are a continual drag on performance, while the benefits are uncertain. The average actively-managed fund consistently fails to outperform its respective benchmark. More importantly, identifying the managers who will win in the future is extremely problematic.