July 2009

Top-down investment philosophy delivers better risk management

By: Kathleen Clough

The past year has tested the mettle of investment managers across the board. And, at PWL, we stand behind our investment philosophy, which has weathered the storm.

Our approach to managing investments and reducing investment risk is anchored on the Efficient Market Theory, which demonstrates that active managers, whether they use fundamental or technical analysis to pick stocks, cannot  consistently beat the market indices over time.

Since markets, not managers, produce returns, we begin with a top down analysis of 12  markets differentiated by countries, company capitalization (large/mid/small) and a value tilt. We feel that our clients should take only  the risk that will be rewarded in the capital markets. Since numerous academic research papers1 demonstrate that the risk premium of drilling down into specific countries, sectors,  or single securities is not rewarded, we avoid these strategies and therefore avoid incremental risks in your portfolio. We work to  capture these profitable aspects of investment risk for you as part of an ongoing strategy, not as a response to short-term market trends.

Much like large pension funds, our investment philosophy draws upon academic research. We do not change our approach to accommodate the latest trends in the investment world. In a  year in which bonds issued by highly regarded companies such as Lehman Brothers, plunged from investment grade to default, and where  the credit ratings of nations like England and the U.S. are being questioned, the definition of risk has changed. Our conservative  topdown approach to asset class investing has paid off as we steered clear of these single stock and subprime risks.

Our philosophy has been tested over the past year. It has avoided significant blows to your portfolios and protected your investments  from the worst ravages of the capital markets. Although at times it may seem difficult to stay on track, we continue to believe our philosophy will pay off in the long term.

1 DFA - The Science of Investing

Kathleen Clough

Portfolio Manager
PWL Capital Inc.