Interview with Baker Avenue Asset Management
Posted by Gabriel F. Burczyk on 5/14/09 9:47 am
Baker Avenue Asset Management was founded by Simon Baker. Gaining traction quickly, the firm’s core managed account strategy, the All Cap Core Equity Portfolio, has significantly outperformed its benchmark since inception through the period ending March 31, 2009.* In this Q&A, Mr. Baker talks about his company, and how its unique investment philosophy has established BAAM as a popular choice for independent investors who place a priority on capital preservation.
WrapManager: What was the genesis of Baker Avenue Asset Management?
Simon Baker: Baker Avenue believes that the tired Wall Street “buy and hold” approach is not suitable for clients who seek a certain level of principal protection. Asset Allocation is a good first step to reduce risk; however, we believe that a tactical approach to equity management that has the ability to move 100% to cash is necessary to provide a higher level of risk control. After successfully managing money since 1996, we launched BAAM, which allowed us to manage the All Cap Core on a platform that provided a truly open architecture.
WrapManager: Tell us more about your investment philosophy.
Simon Baker: Our overall philosophy is predicated on the belief that while traditional investment methods are passive, financial markets are dynamic and ever changing. We believe that investors need to be dynamic, too. We believe that in addition to asset allocation that stresses a traditional buy and hold strategy, a more tactical approach is needed for long-term wealth management. In technically weak markets, our model incorporates a sell discipline that in the past has helped protect client capital. Rather than watch a client portfolio decline, our philosophy is to move to cash and wait for our market sentiment indicator to improve.
Wall Street has done a great job promoting the buy-and-hold mindset, especially in convincing people that it mitigates risk. But in reality, sometimes you need to be in cash. Buy-and-holders say that if you miss the five best days of the market, you won’t benefit from the run-ups. But they never say that if you miss the five worst days of a given market period, you’ll benefit, too. Anyone who had money in the market in 2000-2002 and in 2008, knows that all too well.
WrapManager: Why a “dynamic” strategy? Isn’t that another word for “contrarian”?
Simon Baker: No, it’s not contrarian—I’d say it’s more of an independent thinking mindset. For instance, I could never understand why investors could not get out of down markets. That never made sense. Primarily, there are two schools of investing: the fundamental school and the technician school. The fundamental school believes there is only one way to manage money. But technicians like ourselves tend to branch out—we don’t care how many widgets a company is producing or how the stock is trading. We focus on where the markets are and, in the end, that’s what really counts. When you hit a market like 2008, fundamental investing goes out the window and the technician approach become more important. In short, we have a more proactive approach that actually stipulates wealth preservation as a portfolio objective. We’re not afraid to move to cash in technically weak markets. We’re not big on “weathering the storm” in tough markets.
WrapManager: How do you ascertain whether it’s the right time to be in the market?
Simon Baker: We use a blend of fundamental and technical analysis to assess the appetite for risk, and look to see exactly where we are in the market. Then we ask, “Is this a market where we could make money or is there a potential for a big selloff?” To help evaluate market risk, we use a proprietary tool we developed that measures the overall market sentiment called the Baker Avenue Market Sentiment Indicator. It is a quantitative model that is formulated by using moving averages and other technical indicators on an index of over 4,000 stocks. It’s our barometer on the market, which tells us whether things are positive or negative for stocks. This mechanically drives our cash to equity allocation, portfolio construction and a strict sell discipline.
WrapManager: What type of investor is this style suitable for?
Simon Baker: Our typical clients tend to be affluent individuals and families and trusts. However, regardless of the client’s profile, they all seem to have the same interest in an investment approach that will be as proactive in protecting principal as it is in creating it. I think clients who are at or nearing retirement would be at the top of the list. They just cannot afford to be down 40% in any given year. They really need to be protected. That said, we work with younger clients, too.
WrapManager: What’s your key message to investors?
Simon Baker: As Investment Managers we believe that the traditional approach to investment management that relies solely on asset allocation and a buy-and-hold philosophy will ultimately fall short of clients’ expectations. This was demonstrated by the US stock markets of 2000-2002 and 2008 in which there was no downside protection. Markets are dynamic so investment management should adjust to reflect current economic and market conditions. Our investment approach involves making tactical shifts in our asset allocation to take a defensive posture in negative market sentiments and a more aggressive approach in positive market sentiments.
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*Statements based on reports produced by Informa Investment Solutions dated March 31, 2009.
The above statements represent the opinion of Simon Baker of Baker Avenue Asset Management. Opinions are subject to change and are not necessarily those of WrapManager, Inc. or Prospera Financial Services.
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