Risk Management

At Sierra Investment Management, risk management is as important to us as it is to our clients. In 1987, leveraging extensive research and deep understanding of the markets, Kenneth Sleeper and David Wright, Founders, developed an innovative investment approach with the goal of protecting our clients’ assets while providing satisfying returns. For every decision we make in our investment management process, we are guided by our two goals of targeting satisfying returns and limiting downside risk. Our approach utilizes an integrated set of risk management disciplines:

Unusually Broad Diversification

Sierra allocates among many global asset classes and re-allocates tactically in response to changes and trends in the economy and investment markets.  Sierra has been using diversification as a strategy for decades to build balanced portfolios with low risk. In fact, we employ broad diversification across a wider variety of asset classes than most managers. Sierra may invest in any of the following asset classes depending on the investment outlook of the management team. (The High Yield Corporate Bond, Municipal Bond and Strategic Income programs are limited to certain asset classes – see their program descriptions for more information.) Through mutual funds, we access the following asset classes:

  • U.S. and foreign stocks
  • Commodities
  • Currencies
  • Ultra-short-term bonds
  • U.S. government bonds
  • Floating rate instruments
  • Municipal bonds
  • High-yield corporate bonds
  • High-grade corporate bonds
  • Emerging market bonds
  • Bonds of European countries
  • Real Estate Investment Trust (REIT) common and preferred stocks

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Strategic Allocation

1  Diversifying within each Asset Class

Sierra selects mutual funds for each program according to the management teams’ investment outlook and the goals of the particular program. An advantage of using mutual funds is the diversification of securities in each fund

2  Identifying Skillful Managers

Sierra focuses on finding managers who are good “risk managers”. We use a set of criteria to determine the most skillful managers for each fund and asset class. Finding fund managers that are good risk managers is extremely important to adding value – especially in riskier asset classes.

strategic-allocation

Tactical Sell Discipline and Daily Monitoring

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Hypothetical example representing the Sierra High Yield Corporate Bond Program from1998 to 2001, a particularly tough period for the high yield asset class. Red arrows represent sell signals, while green arrows represent buy signals.

Sierra actively manages and monitors each fund in your account on a daily basis, so that you don’t have to. We are constantly analyzing performance and risk levels in order to apply our proprietary risk-limiting sell discipline when necessary.

Sierra applies well-proven risk-limiting disciplines (similar to trailing stops) to each holding in all client accounts. A predetermined formula for each asset class determines the trailing stop price below each holding. Each fund is monitored daily and if it declines mathematically more than a normal fluctuation for its asset class, we move that fund to cash temporarily to preserve capital and any gains. We then determine when to move back into the asset class or upgrade to a different asset class.

By responding deliberately to actual changes in trends, as they occur, we are able to limit exposures to significant declines, offering a degree of downside protection not available with buy-and-hold strategies.