Longtime friends and colleagues, Steve Carl and Mike Jones had an epiphany. While meeting for breakfast at a Brighton institution, the Charbroil Restaurant, the two investment industry veterans discussed, among other topics, the most recent Dalbar Report release.
“According to the 2017 Dalbar report, for the 30 years ending Dec. 31, 2016, the average equity mutual fund investor earned 3.98 percent annualized return while the S&P 500 returned 10.16 percent. For calendar 2016, the average equity fund investor earned 7.26 percent while the S&P 500 returned 11.96 percent.”
Basically, the individual investor got the short end of the stick for two primary reasons — the fund managers underperformed, especially when high fees and tax inefficiencies were factored in; and the investors fell prey to behavioral finance concerns, emotional overreaction, by selling after a period of bad performance and adding funds after a period of good performance. The study’s results were not surprising to these investment professionals as they had seen these patterns play out many times over their years in the investment world. Their discussion quickly turned to how do we fix this situation? Essentially, Jones pointed out that “Decades of academic research support a methodology based upon the bedrock principles of providing diversification, low cost, appropriate exposure to certain factors and rigorous risk management. So, we should embrace the simplicity and rigor of that approach for clients but also highlight the common emotional pitfalls of investing and how to avoid them. So many investment firms are managing money completely contrary to how the academic research would suggest — high cost, high turnover, very little risk management and factor exposure. So, let’s create a firm solely focused on giving clients the highest probability of investment success!” In that moment, High Probability Advisors was born.
From that meeting in July 2017, Carl and Jones began building the firm and struck a deal with the University of Rochester to lease office space at 110 Office Parkway in the Tobey Village Office Park where the University Institutional Resources team manages its multi-billion dollar endowment. Jones and Carl led the group from Clover Capital that donated the same building to the university in 2004. With office space secure and systems being put into place, HPA then recruited another key figure, Michael Cicero, to become the director of portfolio research & management in October of 2017. Together, this group created and continues to refine the investment strategy and portfolio structures. In November of 2017, Alicia Carter joined the firm to lead Operations and Client Service Administration building on her experience in those areas with another large RIA firm. With the key people and systems in place, High Probability Advisors officially launched on Nov. 17, 2017, and is serving clients in multiple states throughout the country.
For HPA, factor exposures are the primary driver of risk and return in equities, fixed income and other asset categories, so these factors steer HPA’s portfolio construction process. The client’s goals set the objective while a predetermined combination of factors align the expected risk and return profile of the portfolio. HPA’s strategy focuses on delivering risk-managed portfolios. The factor driven method allows for greater consistency in maintaining the desired level of risk. Controls are used to ensure diversification across asset class, market capitalization, sector and regional exposure. As a result, HPA provides a low cost, tax-efficient, risk optimized approach that can be customized to meet a broad array of client objectives.
Jones summed up the effort this way: “In our view, combining these various disciplines and products will allow us to guide our clients to a high probability of reaching their investment goals. We also know that progress will continue; we are committed to embracing change whenever we see the opportunity to improve our client’s outcomes. From a blank sheet, we created the best systematic approach to investment success that we could envision. Our focus is on client success. Obviously, it is easy to be committed and enthusiastic with such an effort. I am energized by the opportunity to continue my career path, working with a creative team in pursuit of investment excellence for our clients.”
Local businessman and HPA client, Mark Goldberg, shared that he “really appreciates how they — HPA — point me to the research studies supporting why they manage my account as they do. I find it very informative and comforting.” Carl said “that is why we started the firm — to help people and organizations invest rationally by striking the balance between maximizing their investment portfolios with minimizing the risks they take to achieve those results. Our hope is future Dalbar studies will report much better results for investors, at least in some part due to our efforts!”
High Probability Advisors is located at Suite 130, 110 Office Parkway, Pittsford. For more information, visit highprobabilityadvisors.com or call (585) 485-0135.