Accretive - in Finance and Life – March 2017

Accretive is a word we use a lot at Auspice.   It is the process of improving something, making it better.  

While adding value gets talked about a lot across aspects of business, consumer products, services and even in the financial industry, it is a little different than being accretive.  “Added value” is about making the product more appealing.   For example, a jewelry business may use high end displays or wrapping. This may make customers willing to pay more for the product. It is an add-on or feature that gives the product a greater sense of value.

If you are an investment advisor, what sets you apart? Perhaps the added value of estate planning, insurance, or cash efficiency can separate your practice from the pack and low cost alternatives, but these things don't necessarily improve the portfolio for your client,— that is a little harder. If you are an institutional investor or think like one, the plan you represent (investor) doesn’t have the same need for the bells and whistles of added value services, but adding unique value to the portfolio is indeed critical.

When people talk about improving a portfolio of assets, we often hear about the added value. Anything that either makes the portfolio provide higher returns, or feel better for the investor could be called added value. Therefore, doing more of the same thing that is working right now (long equity) in a different (high-beta) wrapper is essentially "added-value". When we refer to changes to portfolios as being "accretive", it answers the simple question, "does this improve the portfolio?" This improvement could be in the form of better returns, or just as important, reduced risk (volatility, drawdowns), better risk metrics (Sharpe, MAR, Sortino ratios) or a combination thereof. To do this, the asset needs to be different; do different things at different times than what you were already doing – make gains at different times.  

In fact, the only real reason to add a new "asset" to a portfolio is to be accretive to what you have. Not more of the same. Not an extra policy or feature.  

When you are looking at your portfolio, or the one you oversee, how do you decide to add something new? Does it provide a diversification of risk versus simply a further diversification of capital (see January post on this topic here)  We believe that adding assets should not only be based on the obvious goals of increased returns, but that new assets should be accretive to what you already have.  It should enhance and improve the portfolio. 

This is no different than the walk of life. We are looking for things that actually improve our lives and how we live - in some way benefit society or leave the world a better place.  Like your investment portfolio, sometimes adding shiny things feels great for a while, but they don't matter that much in the end.

Be accretive. Or what’s the point?