RISK, RISK, RISK…How much risk is in your portfolio?

Written by Jeff Jorgensen, Chief Investment Officer

“Offense sells tickets, but defense wins championships.” – Bear Bryant
 
Most of our competitors rely on one of two basic "risk management" approaches:
 
1. Closet-indexing—managing risk by sticking close to the benchmark stock weights, which results in no active share, no conviction, and mediocre returns.
2. Research-backed risk management –buy the preferred stocks based on bottom-up analysis and hope it substitutes for true portfolio-level risk management.
 
Let’s break down #2 with a baseball analogy (because, hey, I’m a retired jock). ⚾
 
Imagine you use the best data and scouts to assemble a powerhouse lineup of offensive juggernauts. Amazing, right?
 
But what if they’re all outfielders? A ball is hit to shortstop, and it’s an inside-the-park home run!
 
You need an offense that can play defense too, no matter what’s thrown at you. 🚨
 
At Cap Six, risk management guides everything we do—from eliminating guesswork in stock selection to building portfolios designed to perform across multiple market environments.
 
You may be thinking, “Sure, this makes sense in baseball, but does it really matter in investment management?”
 
We certainly think so. Risk management is critical to portfolio construction, and that directly impacts performance.
 
One competitor we follow has underperformed substantially and consistently over the last five years.
 
Their fundamental analysis? We hear it’s solid. So, what’s up?
  In our view: poor risk management and portfolio construction. They took big, unguarded bets on sectors, industries, themes, and market risk factors. And then… the ball was hit to shortstop (over and over) with no one fielding the position.
 
Did they intend to take these risks? Probably not. They likely relied on their fundamental analysis and hoped it reflected the market conditions that were coming. But it did not. And the stock picks alone weren’t enough to defend their clients’ investments from years of underperformance.
 
At Cap Six, we spent years building a risk management process that lets us focus on stock selection without needing to predict every market move perfectly. So far, it’s going well.