When Zephyr announced Auour Investments as the Manager of the Decade for our Global Fixed Income strategy, the recognition was a moment of pride. Naturally, it sparked curiosity: How did a boutique firm like ours, with no analysts stationed across the globe or ex-Fed officials on speed dial, outperform industry giants like Morgan Stanley, PIMCO, Janus Henderson, and Capital Group?

The answer lies in the very DNA of our firm and the principles we’ve embraced since day one.

A Different Path

The Goliaths of the investment world operate with vast research teams, global reach, and dominance in trading volumes. They have the scale and connections to uncover every inefficiency in the pursuit of identifying “the best bond” or “the best stock.” And yet, empirical evidence tells us that this relentless search is often a losing game. Historically, the Goliaths have not consistently outperformed through their asset selection. With thousands of brilliant minds competing in the same space, inefficiencies quickly disappear, leaving little edge to be gained.

Adding to their challenges, many of these large firms rely on static asset allocation processes, hugging benchmarks to minimize the risk of deviating too far from the norm. They fear that significant deviations could harm their products or reputation. This rigidity, placing their marketing needs above client outcomes, often leaves them unable to adapt to changing market conditions, further limiting their ability to deliver consistent outperformance.

Auour doesn’t play that game. Instead, we built our processes to focus on the broader view: understanding and adapting to the risks inherent in the overall market. While others pore over individual securities, we leverage low-cost tools—exchange-traded funds (ETFs)—to outperform them through dynamic and intelligent asset allocation. Using passive ETFs reduces costs while gaining the precise exposures we need to execute our strategies effectively.

“Our dynamic approach adapts to market conditions, outperforming the Goliaths through intelligent risk management and cost-effective strategies.”

Active Navigation, Not Static Drift

Think of static asset allocation as sending a fleet of sailboats across the Atlantic, setting the sails at the start, and hoping some reach the destination unscathed. It’s a gamble on fair weather. At Auour, we approach investing like experienced navigators, constantly monitoring for storms, shifting winds, and hidden icebergs. Our active approach allows us to adjust course when conditions change, aiming for the best outcomes regardless of what the market throws our way.

Our focus on risk is not just about avoiding the obvious storms but also understanding the undercurrents that can subtly shift the market’s trajectory. We analyze factors such as credit costs and availability, momentum, valuation, and the interactions of markets across the globe to gauge how the market’s attitude toward risk evolves. By combining data-driven insights with a disciplined approach, we seek to protect against downside risks while positioning our portfolios to seize opportunities when the environment turns favorable.

This dynamic strategy—paying attention to how market attitudes towards risk shift over time—has been the cornerstone of our success. By focusing on risk, not predictions, we’ve managed to rank second in overall return and first in risk-adjusted return during our first decade. That’s no accident; it’s the result of our disciplined process and our commitment to looking at the bigger picture.

Dynamic Doesn’t Mean Tax Inefficient

One misconception about dynamic asset allocation is that it leads to tax inefficiency. At Auour, we’ve demonstrated this doesn’t have to be the case. All our products are built on the same foundation of monitoring and adjusting to risk. Though our strategies are dynamic, they are strategically dynamic, making moves only when needed and always with an eye toward tax efficiency.

“Dynamic doesn’t mean tax inefficient—our strategies minimize tax drag while maintaining the flexibility to seize market opportunities.”

Our demonstrated results speak for themselves. Despite being dynamic, our strategies have produced less tax drag^*** than the Goliaths’ comparable solutions. This approach allows us to aim for the best of both worlds: dynamic, risk-adjusted strategies that adapt to market conditions while minimizing unnecessary tax burdens for our clients.

Disclosures

Past performance is no guarantee of future returns. All investments carry the risk of principal loss. Auour Investments, an investment advisor registered with the U.S. Securities Exchange Commission, did not pay for this recognition.

(*) Universe Benchmark

(**) These benchmarks or indices are derived using universes of PSN separately managed accounts, (“SMA Indices”). Any SMA Indices should not be deemed an offer to sell or a solicitation of an offer to buy shares of any products that are described herein. Index or performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly into an index.

(***) For our purposes we have calculated tax drag based on the current federal tax rates for a family with an annual income of $400,000.

Top Guns Manager of The Decade Critria: The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. PSN Top Guns investment managers must claim that they are GIPs compliant. Mutual fund and commingled fund products are not included in the universe. Products must have an r-squared of 0.80 or greater relative to the style benchmark for the latest ten year period. Moreover, products must have returns greater than the style benchmark for the latest ten-year period and also standard deviation less than the style benchmark for the latest ten-year period. At this point, the top ten performers for the latest ten-year period become the PSN Top Guns Manager of the Decade.

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This past year experienced a change in the investment story. The year started with the belief that inflation was transitory. Now, the story is one of higher for longer inflation. With historic changes in interest rates and global central banks determined to fight it at almost all costs, the story increasingly became about the upcoming recession. Market commentators have been impatient with their desire to call the recession but, it would be hard to find evidence that we have entered one yet.

Though we haven’t entered a recession yet, there can be no doubt that the anticipation is having an impact. The changing investor sentiment is making its way through the economy. No longer focused on a growth-at-all-costs operating model, company management teams are now preparing for an economic slowdown. It is still being determined what that means for the jobs market, consumer consumption, and investment outlook. Will it be a hard landing, a soft landing, or a complete avoidance of economic pain? Almost everyone has an opinion but there is no way to be certain. We will lay out our thoughts as we enter the new year.

Leaving a forward look for another time, now is a good time for reflection. We have long described our investment process as rooted in gauging where investors are on the Greed Spectrum (from excessive greed to excessive fear) and the Confidence Spectrum (from extreme complacency to extreme uncertainty). 2022 started with a high level of greed and complacency and appears to be ending with higher levels of fear and rising levels of uncertainty. We don’t think we have seen the peak in fear or uncertainty.

If we are right that uncertainty will be with us for a bit longer, we think Peter’s words below are apropos.

The holidays can be especially challenging time of the year for many. Whether we realize it or not, they prompt moments of reflection and comparison where we conclude we’re not enough.

With these thoughts in mind, I’d like to offer some thoughts on something called underconfidence – for if I have a concern as we close out 2022, it is just how widespread I see this phenomenon today, especially among highly talented, deeply feeling people.

We readily accept the idea of overconfidence – the idea that we can grossly underestimate risk, as we imagine too much certainty and too much control ahead.

We need to be more open to the idea that we can be underconfident – that we can just as easily grossly overestimate risk – that we can imagine things are far more uncertain and we are far more powerless than we really are.

We are routinely underconfident. If you trembled on an airplane amid heavy turbulence or feared for your life on a rollercoaster, you’ve woefully overestimated the peril you really faced.

But your feelings were real. So, too, were the stories you told yourself and what you did in response. All were undeniable.

Ironically, that is what makes them so helpful as a framework to help us better identify when we are underconfident. Our feeling, stories and actions exist in equilibrium. If we know one, we know them all.

Whether we realize it or not the future is always uncertain. And it always was and always will be. Like it or not, we never know what is ahead.

What changes is our imagination of the future. Because the future is unknown, we must come up with something to fill the void. We abhor uncertainty.

To fill the void, we come up with stories – often together with others. Today, we are awash in shared imagined stories of the future.

What we overlook is that those stories all precisely mirror how we feel. They are reflexive not predictive. They are a much better assessment of how we feel than they are an accurate read of what is to come.

Anytime we tell ourselves extremely positive stories that reflect extreme certainty and control ahead, we need to recognize that we are being overconfident. Moreover, we are likely to take actions that reflect those feelings. We will take too much risk than we should.

And it’s the same at the other end of the Confidence Spectrum. When we are underconfident, we imagine too little certainty and too much powerlessness than there is likely to be ahead.

And the consequences are many. We’re too pessimistic. We overthink. We turn more inward and are less social. We lose our drive to move forward. Moreover, in comparison to others, we feel less than and sadly in every way.

Our underconfidence confines us. We feel trapped in a cage of relentless uncertainty and powerlessness. Like passengers on a highly turbulent flight, we want off the plane.

Handling underconfidence requires us to be open to the reality that the condition exists and is routinely in our lives.

It also requires us to look at our feelings, stories and actions as objective facts – to assess them honestly not for their accuracy but for what they say about our level of confidence. Remember they are a three-way mirror.

It also means we need to let go of the stories that not having confidence is weakness – and all the self-blaming stories we tell ourselves.

Being healthily underconfident starts with being able to say, I don’t feel certainty and/or control in my life right now.

More importantly, it starts with not extrapolating those feelings into the future. That is where things get dangerous. When we catastrophize, we tell ourselves stories that our feelings of uncertainty and powerlessness will be intense and unending.

Again, while that may all feel true, it is pure confidence-driven imagination.

For what it’s worth, the early days of the pandemic were accompanied by collective catastrophize – feelings of uncertainty and powerlessness were saturating and being extrapolated in every dimension possible – and so were the stories and actions that reflected those feelings.

While we didn’t know how we would in the moment, we made it through. Little of the horror we vividly imagined happened.

We need to keep that in mind. While I am not saying it’s easy these days – especially with every other ad and news story reminding us that we “live in uncertain times” -recognizing the reality of underconfidence can help us to be more resilient.

IMPORTANT DISCLOSURES

This report is for informational purposes only and does not constitute a solicitation or an offer to buy or sell any securities mentioned herein. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. All of the recommendations and assumptions included in this presentation are based upon current market conditions as of the date of this presentation and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal.

All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. Information contained in this report has been obtained from sources believed to be reliable, Auour Investments LLC makes no representation as to its accuracy or completeness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect our judgment as of the date of the materials and are subject to change without notice. The securities discussed in this report may not be suitable for all investors and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own investment decisions based on their financial situations and investment objectives.

The costs to do it well.

Large firms spend large sums of money to hire analysts specializing on understanding the drivers of an industry, the key players within it, the subtlety of a management team’s focus and drive.  As I was one of those guys, I traveled quite a bit to meet face to face with management teams.  Riding in the delivery trucks to meet customers, speaking with suppliers, etc.  All with the idea to develop a deeper understanding into the means a company drove value creation… or destruction.  I was trained by ex-CIA interrogators on methods to question management teams to detect deception.  We retained forensic accountants to go through companies’ financial statements.  These are the actions of the large mutual fund complexes, institutional asset managers and the established specialized hedge funds.  It must be viewed with a skeptical eye when someone attempts to invest in single securities without this level of detail.  Their competition is doing it.  If they are not, I suspect that they may be at a disadvantage.

Reinforced with empirical evidence

This is not to say it’s impossible to outperform these large complexes.  I will be the first to suggest that the large institutions have their own problems that harm their chances to outperform on a consistent basis.  But one must be cognizant that a a manager in the suburbs with limited resources has considerable headwinds.

To make matters worse, considerable evidence suggests that between 63% – 95% of professional managers underperform their mandates.  This has been shown to be true across investment styles, market caps, and economic conditions.  So, the net effect is that you need to believe that your manager is in the top 5%-20% of all managers around the globe to justify his desire to stick you in individual securities.  Those aren’t great odds…

The elephant in the room

To make matters even worse, stock picking may not even be that important compared to other factors.  In repeated studies, it has been shown that over 90% of the variation in individuals’ historical returns can be attributed to two factors; market participation and asset allocation.  That would indicate that individual stock selection has a very minor impact on your long term returns. Combine that with the fact that most managers underperform, it’s hard to understand why you should pay them for their skill at all.

All is not lost

It may sound like I am being harsh towards active managers.  I am.  Most deserve it.  Not all of them, but most.

The above studies’ results have most definitely influenced the architecture and processes of Auour. From a rational review of the current research, we have decided to approach investing by attempting to control the factors that drive performance; market participation and asset allocation.  And to do so with an eye on costs.

The above is not to say that all active managers are poor.  We are true believers that great investors exist.  Our experiences suggest that they focus on small companies or more esoteric investments where information inefficiencies tend to be larger.  Auour looks to identify those that have demonstrated skill over the long term and over various economic conditions and integrate them into a cohesive investment plan to drive stability in philosophy, durability in process, and performance in our clients’ assets.

I have spent the last 18 years as an individual focused on determining the value of various investment assets.  Over that time, it has become crystal clear that over short and possibly even intermediate time periods, value is in the eye of the beholder.  As with any freely traded asset, the current value is derived from the current participants in the trade.  It may not be clear what is driving their thoughts on the underlying value but what is clear, at least to me, is that it is decided by their current priorities, their assumptions around the future, and most importantly their emotional state.  Because of this, there are too many variables to derive a single stable number that represents the value of an asset.

That’s why Auour has adopted, as many participants have, a belief that the value of an asset is more a spectrum of values.  By looking at the varying drivers of a company, asset class, or market, one can gain a level of understanding of the range of values an asset carries.  And with this information, an analysis on the potential return (to the high end of the spectrum) and the potential risk (to the low end of the spectrum) can be performed and used to form an investment decision.

Its a respect for the various outcomes and an appreciation for the current market participants’ needs that can assist in discovering opportunities and risks.  By having a longer term investment horizon, our focus on the material drivers to valuation provides us the opportunity to weather storms with more confidence and take advantage of discontinuities as they occur.