The Strategis Story

Strategis Financial Group has operated as a registered investment advisor for nearly two decades. During that time, the owners have developed a pretty good understanding of investor expectations. Although located in Provo, Utah, the independent firm works with individual clients in many different states. In addition to managing assets, Strategis emphasizes investor education.

Mark Sumsion, company president and CEO, said, "Investors can lose focus and worry primarily about what investments are making the biggest gains. Often there is little regard for risk, volatility, or concern about what is appropriate for investors at or nearing retirement."

Strategis was founded in 1989. Four partners who all worked together at a national brokerage company wanted more flexibility to advise clients. At the time, the industry environment was dominated by large, full-service brokerage firms. The four men believed they could offer more personalized service than the big international brokerages.

The partners established Strategis with an emphasis on active management of mutual fund strategies for individual clients. Active investment management is still the firm's focus, with an objective of attempting to move to lower volatility investment vehicles during periods when market risk appears to be high.

Two of the original owners remain: Mr. Sumsion and Scott Garbutt, executive vice president and chief compliance officer.

In the 1990s, Strategis Financial Group's directors began searching talented investment managers who offered distinctive actively managed investment strategies. During the powerful bull market of those years it was easy to find managers with impressive returns.

But as Mr. Garbutt explained, "The real challenge was determining the validity of a manager's methods. We turned away several managers who produced impressive returns because we believed they did well in spite of their methods, not because of them."

There were many investment strategies that appeared substantive. But performance alone can be an incomplete predictor of ability. Both partners said they knew a bear market would provide the real test.

When the technology bubble burst technology stocks lost $5 trillion in market value between March 2000 and October 2002, according to Wikipedia and other sources. This had a significant impact on the investment industry and some previously successful investment strategies struggled to handle the difficult market environment.

Sumsion said that the managers they eventually selected met or exceeded their expectations. While some of those managers have changed through the years, the philosophy of using active managers who add value by managing risk remains the same.

"Our blend of strategy offerings is unique. Other advisory firms can use similar methodology, but many of the actively managed strategies we offer are not available through any other firm," Sumsion explained.

Avoiding the performance trap

Make no mistake—investing is about performance. But one cannot make wise investment decisions based solely on track record. If you've read the fine print accompanying any investment information (and you should), you'll find a statement that says "past performance is no guarantee of future results."

The law requires that such a disclaimer be included and research by Dr. Gary Hirst, Mark Finn and others have shown that such a disclaimer is warranted. Strategis has seen firsthand that just because an investment trading strategy worked once, twice, or even 10 times in a row does not mean it will continue to occur in perpetuity. Each bear market teaches another group of investors this lesson.

The risk/reward trade off

There is an inseparable inverse relationship between risk and reward. It is as real and unchangeable as the relationships between hot and cold, between pleasure and pain, or between light and dark.

Standard deviation might be the most common measurement of investment risk. The primary problem is that standard deviation is a measure of volatility, but not necessarily risk. A portfolio with low volatility is traditionally thought to have low risk. But a portfolio with low standard deviation could still lose money. On the other hand, an investment with high standard deviation could offer substantial returns.

Mr. Garbutt said, "Once we identify strategies and systems that appear to add value the obvious question is: Why not place all the assets with the system or manager that produced the best returns? There are several reasons."

First, the strategy that produces the highest return is probably unsuitable for many investors. Remember the link between risk and reward. The strategy that carries the highest reward might also be the most risky. Under normal market conditions, most investors do not possess the emotional fortitude to handle a double-digit loss. Yet in any high-return strategy, double-digit volatility is a near certainty.

Second, diversification is one of the most important elements of risk management. It is never a good idea to bet the farm on a single roll of the dice. Dividing assets among different managers and strategies is a good way to attempt to reduce risk if those instruments are proven and non-correlated.

Finally, investors all have different needs. A young couple with a moderate income and no children probably should not have the same investments as a wealthy retired couple who like to travel and to spend time with their grandchildren.

In addition to diversification among asset classes, Strategis can diversify assets among a range of investment strategies. Then it attempts to create a blend that matches the investment needs and risk tolerance of each client.

"Because the type of active management we practice is proprietary, we could choose to restrict it to clients with very large accounts," Mr. Sumsion said. "But we have always believed that the principles of active investment management should be available to clients even with minimum qualifying accounts."