We developed a framework for building and managing our investment portfolio, and view it as a critical component for long-term investment success.
Below, we present key ideas behind this framework.
Sephira Asset Management is constructed as an absolute return fund. This means the managers’ focus is put not on maximizing the annual performance vs. an arbitrary benchmark but on capital protection and long-term capital appreciation. Through proper structuring of our investment portfolio, we want to avoid large drawdowns, as they are detrimental to capital compounding and may have a lasting negative psychological impact. This means the fund may underperform the major indices in a given year while still offering good medium- and long-term returns.
We may maintain a significant cash position in our portfolio. Traditional asset managers remain fully invested to match the performance of their benchmark and generally view cash holdings as a drag on performance. However, in the context of an absolute return fund, the cash position has important defensive qualities and offers substantial optionality for attractive reinvestment, specifically when the equity market remains volatile and trendless.
Our fund will have a long equity exposure bias. Short equity exposure may be added as a risk management tool in periods of perceived overvaluation of a specific sector, investment style, or equity market overall.
We expect to use low-to-moderate levels of leverage, mainly to engineer required short equity exposure and facilitate hedging of the portfolio’s FX risk. Our long equity investments will be done mostly on an unlevered basis.
We analyse potential equity holdings as possessing two fundamental attributes: quality – understood as current cash flow generation capabilities, and optionality – potential for a significant increase in future cashflow generation.
Our goal of constructing an investment portfolio that has a convex, option-like payoff profile, is facilitated through an optimized mix of quality and optionality features of portfolio investments based on relative costs and availability.