It’s one thing to help someone achieve success. It’s another to make it last. We help you do both.
At Versant, aligning your interests with ours allows us a totally different perspective on investing than traditional banks and brokerages. Your goals, circumstances, and preferences come first. Our first duty is to help make your financial and human resources work to meet your family’s goals and objectives.
Our investment philosophy rests on the bedrock of Versant’s investment beliefs, and its application through our investment process, governed by our core values.
Versant Capital Management’s investment perspective began more than 30 years ago, when Tom Connelly’s profession as a geologist trained him in the art of observation, the scientific method, and a wealth of background in geology, chemistry, and physics. As a young scientist looking for natural resources in the western US, knowledge, critical thinking, perseverance and upbeat optimism were necessary for a successful career.
These characteristics carried over seamlessly to his new career as an investment professional, but he was lacking in one particular skill – the art of sales, which was, and still is, closely tied to compensation in the investment profession. The investment business as applied to the individual market was dominated by sales, where decisions were made in the best interests of the sales organization, rather than the client.
In 1990, Tom joined a very small group of practitioners in the investment profession who gave financial advice and managed client assets and were compensated only by fees paid by those same clients. There were no commissions, referral fees, markups on investments, soft dollars or any other source of income that might generate a conflict of interest. Although this model is much more prevalent today, the principals at Versant were practicing in this mode before the marketplace demanded it.
Versant Model: Focus on client goals
- Turnover & Taxes
- Changes in asset allocation
- Proprietary products
Traditional Model: Focus on product sales
- Turnover & Taxes
- Changes in asset allocation
- Proprietary products
Our investment beliefs and values are not recently formulated marketing statements designed for maximum sales impact. Rather, they are the result of decades of experience and learning, forged in the furnace of practicing in your best interests. They are in our DNA.
In today’s fast-moving financial markets, millions of intelligent individuals with nearly instantaneous access to data and information weigh their choices and set prices for all types of investments. In this type of environment, prices of investments tend toward fair value. Markets are said to be “micro-efficient.” If markets are indeed efficient, we should see the results in the investment returns of professionals, and indeed we do. The fraction of surviving stock and bond mutual funds that beat their respective indices over the ten-year period ending in 2013 was only 19% and 15%, respectively. And this does not account for higher tax liabilities typically generated by actively managed funds.3 For this reason, our individual investment choices tend to be passive or index funds that replicate entire markets, or underlying return drivers, inexpensively and with fewer tax complications.
Modern markets show considerable micro-efficiency (for the reason that the minority who spot aberrations from micro-efficiency can make money from those occurrences and, in so doing, they tend to wipe out any persistent inefficiencies). In no contradiction to the previous sentence, I had hypothesized considerable macro-inefficiency, in the sense of long waves in the time series of aggregate indexes of security prices below and above various definitions of fundamental values.
Paul Samuelson, private letter to Robert Shiller and John Campbell, 1998.
Expected nominal returns on cash and bond markets are readily derived from yield curves, whereas future earnings growth and terminal valuations must be forecast to arrive at equity market returns. We choose a business cycle because some forecast errors cancel over intermediate time periods, and forecasting accuracy decays with time. Forward-looking, long-term investment returns are forecasted for global stock, bond, real estate and cash markets over the next market cycle, typically for 10 years.
Since the global opportunity set changes with time, return expectations – as well as your goals, circumstances, and preferences – change, requiring a periodic reexamination of strategy. This is referred to as a strategic asset allocation strategy, where changes are made on the basis of long-term return and valuation considerations, rather than short-term tactical strategies based on market or media noise.
The financial media and industry exist by creating needs born of distress or elation… they feed off of a constant stream of disturbing financial and geopolitical news and commentary designed to agitate, titillate and attract viewership. Very little of this is of concern to the serious long-term investor. In a similar vein, Wall Street can only grow by creating new perceived needs or concerns. Creating an endless stream of new asset classes, factors, gurus, sectors or industries is a constant distraction and source of new products and fees from the financial services industry. How do we discern real value, legitimate investment ideas or perspectives from all the noise? One must be skeptical, rely on research and evidence, and be cognizant of potential benefits after all costs are taken into account.
From a strategic standpoint, Versant portfolio structures are global and are tailored to your circumstances and preferences, integrating your financial and human capital assets whether included in the managed portfolio or not. For example, equity exposure in our typical portfolio reflects the world’s stock markets rather than over-weighting the domestic market. In addition, portfolios are structured around evidence-based underlying global sources of returns. Exposure to these risk factors is in proportion to your financial needs and personal tolerance. Often your financial need for risk might be contrary to your personal tolerance for risk.
Many of your goals are long-term in nature and provide the opportunity to patiently commit capital for long periods of time. In today’s turnover-addled investment marketplace, this is truly an advantage. A long-term, patient perspective allows you to be a provider of capital in situations where liquidity has dried up, and confidence when prices have fallen. At Versant, we allow for a small proportion of equity and fixed income exposures to opportunities where markets, sectors, countries or return drivers have been severely dislocated for the short-term.
Our definition of an investment is the exchange of current consumption in return for a set of future cash flows, which must be discounted back to current dollars. In other words, we are exchanging possible current consumption for future consumption, plus “rent” in the form of interest, dividends, rents, premia or price changes. Our investment process seeks to diversify and reduce risk by seeking out investments, or future sources of cash flows, that behave differently in varying economic or financial environments. Some of these solutions are creative and non-traditional exposures to underlying cash flows.
Investment Management Process
The investment process is done in partnership with an informed, educated and engaged client. The economic and emotional interests of all parties are aligned toward accomplishing your goals and objectives. All parties involved operate in an environment of mutual trust and respect, where constructive questioning and creative thinking are encouraged. Investment decisions are based on sound theoretical or empirical foundations, and applied through rigorous processes and informed judgment. Feedback to you is transparent, available on a timely basis, and makes all participants in the process accountable for their actions and decision.
Update Portfolio Inputs
Your relationship with us is managed with your family as the focus, rather than assigning a model or a recommended list of securities to your accounts. We begin with your circumstances. We account for your current and future resources in the form of assets, tax and ownership characteristics, sources of income, human capital, family capital, family structure and social security or other government benefits. We take into account all financial resources, whether we manage them or not, in planning toward your families goals and objectives. How could it be otherwise?
Investment constraints define the parameters of your investment strategy. Consideration of age, health and time horizon of all stakeholders helps to fine tune the quantification of goals. Determination of cash or liquidity reserve requirements protects against the danger of having to liquidate long-term assets in times of market distress. We determine the unique tax characteristics of your personal situation, and how we will account for assets for tax purposes, as well as different types of investments, accounts and legal entities. We examine any legal, regulatory or other unique circumstances that might impact your family’s goals and objectives.
Your investment preferences are important considerations to your family regarding the management of your affairs. Concerns regarding the use of any particular investment or type of investment, preferences regarding social or environmental concerns, holding of existing securities or highly appreciated positions are all examined. Perhaps the most important factors involve a determination of your risk tolerance. Versant works with an independent third party to analyze risk preferences in terms of short-term investment volatility. From our perspective, however, the most important factor for risk is not having enough resources to meet family objectives. Often, these two factors are in conflict with each other, or among the stakeholders, and must be resolved.
The most important component of the portfolio input process, and indeed, of the entire wealth management process, is your family’s goals. From an investment standpoint, goals are quantified in light of your constraints and preferences into future expenses that must be met by family resources. Usually, these cash flow needs must be satisfied by switching present consumption into the future, at a satisfactory level of risk.
1. Maddison, Angus (2007): “Contours of the World Economy, 1–2030 AD. Essays in Macro-Economic History”, Oxford University Press.
Determine New Portfolio
Various portfolio structures, with differing proportions of growth-oriented assets, are examined against your goals on an after-tax basis to see which combination of assets most efficiently accomplish your family financial objectives with the least amount of risk. All stakeholders participate in risk profiling conducted by an independent third party to ensure that the portfolio structure chosen to meet financial objectives is suitable from a psychological point of view.
Management of market frictions, including transaction costs, management costs, administrative and custody costs, and taxes, are crucial.
Periodic portfolio review throughout the year seeks to maintain your portfolio’s risk and return characteristics by preserving strategic targets at the asset class level.
Financial reality before behavioral comfort.
This means that asset classes that have performed well are sold and reinvested into asset classes that are currently out of favor, resulting in a built-in contrarian strategy. Coincident with portfolio review, tax-loss harvesting opportunities are sought where investments that are in a loss position from an income tax standpoint are sold and replaced with similar investments. This allows the tax loss to be used to your advantage. Portfolio reviews are also used to maintain cash balances to cover current expenditures and fund family goals.
Continuous portfolio monitoring and its performance is accomplished by transparent and accountable quarterly reporting that focuses on investment results at all levels, after taking costs into account. Just as important is periodic monitoring of changes in your family’s circumstances, goals, or investment preferences, any of which can potentially alter portfolio structure as much as changes in market conditions.
Good corporate governance is crucial for properly functioning capital markets. We vote proxies and corporate actions, and monitor securities litigation on behalf of clients for their benefit.