Methods

Investment vehicles have been primarily equity securities, often a sizable percentage being of foreign corporations, and cash equivalents. Security selection was based primarily on proprietary “absolute” valuation models ....and a security's fit within the particular client's portfolio.

Portfolio risk levels are defined quantitatively through a proprietary risk measurement system applied to each investment in the portfolios. Each client has a target Risk Rating for their portfolio. They were set in advance, after extensive discussion with the client. That target risk rating guided the construction of each portfolio and the fluctuation of actual risk incurred over time.

Photo: November, 1999

Long-Term Results

Moderately aggressive portfolios, managed since 1973, have turned in total returns of +12.8%, compounded annually, through December, 2012. These returns exceeded the S&P 500, the DJIA, and the average U.S. growth-oriented equity funds. They were also achieved with less annual portfolio volatility than the other averages. Better returns with lower “risk.” Academics tell us we don't exist. But, then, academics often assume away reality for their own convenience.

A chart of these results is linked on the Opinion page of this site. Of special note is that there have been only 5 losing years in the past 38.......1974 -4.3%; 1990 -5.2%; 2002 -14.9%; 2007 -0.8%; but an appalling 2008.... -25.1% -- still way better than the averages in 2008. We're told we're in the top 5% of equity mutual funds for 2008. We don't know or care. It is just mitigation of lousy results.

Moderately conservative portfolios are no longer managed. While “risk-adjusted” returns exceeded the S&P 500, their absolute returns were OK but undistinguished. Moderately aggressive portfolios have simply done better both in up markets and down markets and on both risk-adjusted and absolute results.

The risk adjustment used: annual total returns, minus the risk free rate, divided by the standard deviation of those returns. That is a variation of the Sharpe Ratio. That ratio doesn't really measure risk very well; but some academics seem to think it does. And it is widely used in the investment business.

Photo: February 2004

Recent Experience

The late 1990s were trying times for value-based investors such as ourselves. Patience was required. Patience and persistence eventually paid off.

From December 1999 through December 2002, all accounts were up, even as all the major market averages were down.

During the rising market in 2003, all accounts returned more than the S&P 500, the DJIA, and the average U.S. equity fund.

During 2004 and 2005, we built Energy positions and raised quite a bit of Cash.  We were playing defense and Energy.   Despite the big cash holdings, Energy positions helped all accounts beat the DJIA, though slightly trailing the S&P 500 and average U.S. Equity fund. 

2006 featured a gradual reduction in Cash as we added to Stocks.  Earnings were slowly reducing the over-valuation in the domestic equity markets.  We had a modest bias toward large U. S. companies.  Consistent with our philosophy, we didn’t chase the over-valued high fliers.  As we had forecast, in a rising market we finally lagged all the major averages, including the average equity fund.  The shortfall was material (positive, but 7-11% points less return).

As Benjamin Graham once put it, “The essence of investment management is management of risks, not the management of returns.” In our view, risk was still under-priced in 2006. We couldn’t expect to win in a rising market. We remained on defense. We were controlling risk – and emotions.

2007 brought more pain.  Our more aggressive accounts were off a tad less than -1%, trailing the positive returns of the DJIA, S&P 500, and average equity fund by -6% to -13%.  More conservative accounts were off -4 to -5%, trailing the averages by that much more than our more aggressive accounts.  No fun.  The market finally broke in the second half as reality burst the preposterous, record-breaking credit bubble. 

2008 featured two distinct market periods. January – August was comprised of a Major Bear market that discounted what seemed likely to be a mild recession. We were prepared for that and more or less fully invested by its “end.” On September 19^th more aggressive accounts were off less than 1% for the year, despite that Major Bear. More conservative accounts were off less than 6%. We were happy up to that point.

September – December was the second 2008 market period, which followed the collapse of Lehman Brothers. Credit markets seized up in what turned into a global financial heart attack. That produced a stock market Crash right at the end of the otherwise orderly Bear Market.

Despite being 100% in stocks in early October, all accounts bested the averages for the year 2008.

2009 vindicated our investment strategy and tactics. By late January, more aggressive accounts had taken on modest leverage of about 23% for purchase of plentiful bargains in stock markets here and abroad. Our moderately aggressive accounts handily beat the averages once again. Returns exceeded +33%., besting the DJIA by over 11 percentage points.

Our bias continued toward large, U.S. companies, that are globally-competitive, have low debt, good cash flows, strong franchises, good growth prospects, and are undervalued on an absolute basis. The crash of 2008 - 2009 provided lots of such firms that we never thought we would be able to own. Those sorts of companies looked especially appealing for the next 4-6 year economic environment we envisaged. It was likely to be a rough one.

2010 saw us edging out the major big-cap averages. We lost to the average growth and equity funds. We effectively applied two periods of very modest leverage. We had a continued material bias for large, U.S. companies, that are globally-competitive, have easily manageable debt, good cash flows and cash dividend growth, strong franchises, good growth prospects, and are undervalued on an absolute basis. That sort of company was not a favorite of the more risk-oriented equity and growth funds. Their approach prevailed. We didn't care. We edged out the major averages due to our periods of modest leverage. We raised our beta a bit using better-quality holdings. It worked.

2011 saw us defeat all the big-cap market averages and ordinary and growth mutual funds averages, with the lone exception of the league-leading DJIA. Leverage was again involved for us – as markets got very scared at certain points. We love that. It was a rocky year. But we were up; most were down.

2012 was another good one for us. We handily beat the DJIA, edged out the average equity fund, but were barely nosed out by the S&P 500. This occurred as we moved portfolios into somewhat more defensive positions which we called “fortress” portfolios. They aren't likely to be market beaters on the upside, but should do a bit better on the downside. They are being designed in the hope of avoiding permanent loss of capital and earning power in an economic contraction and also be able to preserve significant purchasing power in any alternative environment of serious inflation – whether the later is primarily of the Monetary variety we were experiencing, or breaks out into the full-fledged Price variety later.

I had thought 2011-2013 would envelop the final exam for major-league money managers. I thought that period would call for more emphasis on market timing and political judgment than absolute market valuation work. So far, that has basically been true. It has been almost entirely a period dominated by political risks, and driven by the Federal Reserve's unprecedented suppression of short rates and substantial “printing” of money in excess of real wealth-creation in the U.S.– i.e., monetary inflation. In the U.S., the Federal Reserve did this mostly through creation of excess bank reserves.

2014 and 2015 saw our portfolios pretty much move with the averages. A little ahead of some; a little behind others.

So far, in early 2016, we are winning. Still well out in front long-term; down less than all the major averages in 2016. I think the Primary Bear market that commenced around 2000-2002 is still in force. It “should” end in the next couple of years. Markets, however, care little about “should”.

Our long-term 42-year performance history shows our moderately aggressive portfolios continue to retain a significant edge over the DJIA, the S&P 500 and the average equity fund – all the while with less annual volatility. I'm pleased with that. Nothing about the past, of course, suggests that such results will continue in the future.

(Please see the Annual section of the Opinion page of this site, if you wish to see it in log-scale chart form.)

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All told, it has been a very good 42 years in this business.

I am very grateful to the many who have had a hand in making this possible.

Photo: June 2005

Future Projects

1. Consulting

We are looking at additional avenues for the next few years. The business is not designed to succeed Mr. Clucas. Perhaps due to his former Peace Corps Volunteer position, he feels a desire to pass on some of his extensive perspective on the investment process. At a price, of course; and not the Peace Corps' eleven cents an hour, either!

Therefore, Askari is open to consulting for other investment firms who feel they may need a fresh perspective on their investment process. We have acquired a lot of knowledge about the investment process. For many firms, focused on marketing, that has actually been a neglected aspect of their business. There is no risk of competition. Askari does not seek to expand beyond where this business was in December 2006. That is not large. It leaves very little room to expand. Client raiding would thus never be an issue. Preservation of your proprietary information will be easily agreed to. Mr. Clucas's age, and “semi-retired” status will work entirely to your advantage – in every aspect of the investment business.

2. African Equity Markets

For some time now we have been contemplating an internet portal project related to listed equity markets in selected sub-Saharan African countries. We have done research on the ground and invested there before with considerable success in the 1992-1995 period. Very high risks, but extraordinarily positive results.

Serious governance issues in a couple of the lynch-pin countries have been among the reasons this project has been on hold for so long and will probably remain so. The web-based portion of this project would eventually be located at africanequitymarkets.com, a domain name registered to Askari Equity Management, LLC. For the time being, africanequitymarkets.com redirects to this site you are on – askariequitymanagement.com.

However, friends in Africa show us that they and others may be getting the job done ahead of us. Many seem overly avaricious. But they are moving forward.

If our project ever goes forward, it would combine Mr. Clucas's Peace Corps, Law, and Investment backgrounds in an effort to improve investment liquidity in these exciting, but high-risk markets. Occasional updates may be found here in the future.

In 2004, we began an initial survey of a number of the relevant exchanges. We were not impressed with most responses. There has been no material progress on this project since.

However, in 2013, we returned to Africa for another serious 5-week look at listed equity investment prospects.

Two major positives:

(1) The investment infrastructure has been very significantly improved. More professionalism. Better training.

(2) The rise of middle-classes in some countries.

Three principal negatives:

(1) Foreign money managers, seeking “frontier market” exposure, crowding into equity markets and driving prices to overvalued levels.

(2) Governance in critical countries remains a serious social and economic drag. [e.g., infrastructure, corruption, theft, policing, courts]

(3) The rise of radical Islam in several sub-Saharan countries – not so widespread back in the early 1990s.