Sprout Capital charges 1% of assets under management per year.

A registered investment adviser is a firm that provides investment advice and is registered with the SEC and/or with individual states. Investment advisers typically earn revenue through a management fee. An individual working for the advising firm (and providing advice to clients) is an investment adviser representative.

An investment adviser isn’t necessarily a broker, which executes trades on behalf of the client and earns revenue on a commission basis.

Sprout Capital Management, LLC is registered in Texas, and is a fee-only adviser. Sprout Capital is not a broker and does not earn commissions. Kyle Reese is Sprout Capital’s sole investment adviser representative.

Anyone acting in a fiduciary capacity must act in the best interests of those they represent. It is the highest legal duty of one party to another. An investment adviser firm and its employee representatives, when managing the finances of clients, owe those clients the duties of good faith and trust.

Our name is the convergence of a few interesting points.

The ‘sprout’ stage of biological plant growth is robust – able to thrive and grow amid environmental adversity. This is what we aim to do as a firm – grow client wealth despite any market adversity.

Also, early in his career, Kyle’s colleagues jokingly referred to him as ‘Sprout’, the young sidekick of the ‘Green Giant’ advertising character. Kyle is 6’8″ tall.

This is a nuanced discussion.  The value of active management is in managing downside risk. Active mutual fund management is not the same as active management by a professional investment adviser.

• Mutual funds.  Active, stock-based mutual funds have only limited tools to manage risk – they have an investment policy to always stay fully invested, even in a bear market. If history is a guide, active mutual funds can mitigate, but not avoid, severe downside in their target market.
• Investment advisers.  Active investment advisers and wealth managers do not have such a mandate. Advisers have much more flexibility to sidestep a bear market. They can use mutual funds and ETFs to get exposure to a certain asset class or index when they need it, and divest when they don’t.  If a bear market does emerge, an adviser can move his client to cash, or to lower-risk ETFs.
• Hedge funds.  Hedge funds, like financial advisers, have much more flexibility than mutual funds, but focus on highly specific niches.  Hedge funds actively manage downside risk, and may provide an uncorrelated (i.e., diversifying) return to an investment portfolio otherwise invested in stocks and bonds.

Sprout Capital Management, LLC is a registered investment adviser that actively manages client portfolios.

You can…

• Increase safe withdrawal rates.  By reducing your portfolio risk relative to its return, you may be able to withdraw a larger amount during retirement. This doesn’t necessarily mean that you need to invest a sizeable portion of your portfolio in fixed income. Strategies such as tactical asset allocation (TAA) may decrease risk and allow larger safe withdrawal rates, while earning stock-like returns. TAA strategies systematically invest in different asset classes based on specific rules.
• Avoid behavioral issues.  Compounded returns are very dependent on when your money is invested.  A common concern: if you were to invest today, are you investing at the top of the stock market?  With a lower-risk portfolio, you can invest with greater confidence and avoid making behavioral/psychological errors.
• Maintain dry powder.  An investor who preserves assets with a lower-risk portfolio is better prepared to take advantage of rare (but attractive) opportunities after the broad market has fallen.
• Use leverage.  By understanding and lowering portfolio risk, you may increase leverage to achieve a higher return through a broker margin loan or by using derivatives (i.e., futures and options).

Tactical asset allocation, or TAA, is the practice of maintaining a well-diversified portfolio, but systematically re-allocating among investments as relative performance changes. Some TAA strategies rank a select number of investments based on recent performance and allocate to the top-performing portion of those assets. Other TAA strategies use macro-economic information to change allocations.

Yes.

Market timing — especially when it leads to frequent trading — can have adverse consequences, such as increased taxes and commissions.

You should carefully weigh these costs with your risk of staying fully invested.

Sprout Capital uses a few versions of limited, systematic market timing. This is more about “positioning” than “prediction”.

• Trend-following.  Sprout Capital uses long-term ‘trend-following’ to avoid bear markets and decrease downside risk, without sacrificing broad-market type returns.
• Momentum. Often referred to as the ‘premier market anomaly’, momentum has been shown by both academics and practitioners alike to improve returns and decrease risk, depending on how it is used.

While market timing can decrease risk, it also changes how and when positive returns are achieved, compared to a buy-and-hold portfolio. There will be periods when a portfolio with market timing underperforms a buy-and-hold, broad stock market portfolio, so one should always compare long periods of performance between strategies to completely understand costs and benefits.

Sprout Capital backtests its strategies. Strategies that are backtested and robust to statistical flaws can help decrease downside risk. Decreased downside risk means decreased volatility — and more importantly — decreased peak-to-valley loss.