Cardinal Capital aims to beat respective market return benchmarks net of fees with significantly less volatility over a full market cycle. This means that we are trying to generate returns better than those achieved by the respective markets but with lower risk than the respective markets. When successful in doing this, “positive alpha” results. “Positive alpha” represents the outperformance of strategies relative to their respective benchmark adjusted for the amount of risk taken in doing so and is a significant differentiator among managers. We have achieved positive alphas for our equity strategies since their inception.
What’s more attractive is that we have generated these positive alphas while taking less risk than the market. “Beta” is a measure of the volatility of a portfolio in comparison to their respective markets. The respective markets betas, referring to the Standard & Poor’s 500 index, the Russell 2000 index, or the EAFE index, equal 1.0. Therefore, a portfolio with a beta of 1 means that the portfolio’s price moves with the market. Each of our strategies’ betas has been approximately 0.85 since its inception. This means our portfolios have approximately 15% less volatility than the market, an important feature when markets sell off. Creating diversified portfolios with less volatility is one way we manage risk for our clients.
The result is that portfolios are created with the intention of beating the market but take less risk (beta) in the process with positive risk-adjusted value added (alpha). We further manage risk through asset allocation and allow time to work to our advantage. As markets rise and fall over a full market cycle (generally defined as three to five years), we remain invested, taking advantage of opportunities to buy/sell individual companies as they become undervalued/overvalued along the way. The lower volatility portfolios generally fall less in declining markets and rise while gaining the benefit of up markets while collecting dividend income.
