The Orion Capital Management Model for Investing

The Orion Capital Management model for equity investing is based on the science of capital markets not on speculation. Decades of academic research form the basis of our approach. The mission of our strategy is to deliver the performance of capital markets and increase returns through state-of-the-art portfolio design.

Capital markets build wealth. Rather than trying to outguess the markets, we utilize portfolio structure to let the market work for us. Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect returns without bearing greater risk.

Traditional investment managers strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong stocks at the wrong time. Meanwhile, capital economics thrive because markets succeed.

The futility of predicting future market and individual equity performance is good news for investors. It means that prices for public securities are fair, and the persistent differences in average portfolio returns are explained by differences in average risk. The undeniable truth about investing is that returns come from risk. Gain is rarely accomplished without taking a chance, but not all risks carry a reliable reward. Experience and research over the last forty years have given us a powerful understanding of the risks worth taking and the risks that are not. It is certainly possible to out perform markets, but not without accepting increased levels of risk. When you reject costly speculation and guesswork, investing becomes a matter of identifying and choosing how much of these risks to take. 

We view the markets as our ally, not an adversary. Rather than trying to take advantage of the ways markets are mistaken, we take advantage of the way markets are right. Financial economists have identified the sources of investment returns (See Illustration #1). Orion Capital Management utilizes its proprietary tools and experience to incorporate these sources of investment returns into its portfolios. We design our portfolios to capture what the market offers. We relieve the stress and confusion of investing with our clear and empirical approach to wealth management.

Basically, returns in the equity markets can be defined by three basic factors. The first is that stocks are riskier than bonds and therefore have greater expected returns (See Illustration #2). The relative performance among stocks is largely explained by the other two factors: small/large (See Illustration #3) and value/growth (See Illustration #4). Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. Lower prices give investors greater upside as compensation for bearing this risk.

In our system, fixed income is used primarily to manage overall risk in the portfolio. Shorter-term, high-quality debt instruments tend to have less risk. By introducing lower-risk bond strategies to our portfolios we can temper total portfolio volatility while taking more risk in equities where expected returns are greater. Structuring a strategy around these defined risk factors lends purpose to an investor’s portfolio. Rather than analyzing individual securities, the more relevant decision becomes how much stock to hold versus bonds, and how small, large, value, or growth tilted the portfolio should be.

Successful investing means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include too few securities (i.e.: lack of diversification or a concentrated position), betting on specific countries or industries, following market predictions, and speculating on “information” rating services. To all of these non productive risks, diversification is the antidote. Diversification washes away the random fortunes of individual stocks, and positions our portfolios to capture the returns of broad economic forces.

Traditional managers do one of two things. Active managers focus on picking individual stocks, the antithesis of diversification. Index managers hold many securities but mimic arbitrary benchmarks. Now, primarily because of the success of passively managed index oriented portfolios, some active managers attempt to combine both methods by designing portfolios calculated to act like their target indexes. These portfolios usually fall short of expectations due to their cost structure. The Orion Capital Management approach takes a totally different path. Our structured asset class approach provides a more consistent portfolio structure. We diversify the amount of securities we hold in individual portfolios which will number in the thousands, and also focus on utilizing small cap and value asset class characteristics. Our portfolios are diversified worldwide because these principles have been proven to be universal (See Illustration #5).

Orion’s work does not end there. Our process is grounded in the science of investing. Through our deep working relationships with leading financial economists, we are able to incorporate new innovations into our investment models as they become available to us. This provides increased flexibility which can only improve our client’s investment experience while providing the peace of mind and clarity created by our approach.