2020 Investment Philosophy
Michael Schumacher the seven-times Formula 1 world champion commented ‘I make decisions on facts not beliefs’.
Facts are things known or proven to be true, beliefs are an acceptance that something is true.
Human beliefs are subjective but sometimes bizarre. In 2017 a nationally representative survey was carried out, commissioned by the Innovation Center of US Dairy, a forum for the dairy community and it revealed that 7% of all American adults believed that chocolate milk comes from brown cows. That’s around 15 million adults!
An investment philosophy are the beliefs an active investor has that form the bedrock of any strategy that attempts to exploit market inefficiency, whilst they typically are not bizarre in nature (please share any you have that are !) most financial commentators agree that nothing is more important to long term investment success than a clear and compeling investment philosophy. Otherwise, why not allocate the capital to a passive manager with their clear philosophy of ‘I believe in market returns’.
From my perspective as an investment coach fortunate enough to have worked with a long list of skilled active discretionary professionals for the last 14 years, I would suggest that the majority of investment philosophy’s I hear from the asset management industry today are unclear, non differentiated and not fit for purpose.
Below I share some examples of the bad and the ugly investment philosophy’s (anonymised) and conclude with a summary of the key good attributes.
‘We at XYZ believe that markets are broadly efficient but with our team having a combined experience of 65 years, we look to uncover short term dislocations of securities pricing, typically resulting from the irrational behaviours of the broader market participants. Our industry specialisation and forensic analysis of our universe allows us to deeply understand the company fundamentals and thus identify the disconnects between short term price and long term value.’
Coach’s comment - shockingly generic and non-differentiated. Experience means little if the PM’s don’t actively learn from it and no mention of their own irrational behaviors as opposed to those of the broader market.
‘At ZYX our philosophy is clear. We believe in a highly conservative approach to equity portfolio construction and will, at all times, try and preserve capital for our clients. We will likely underperform broad market indices when times are good but outperform in downmarket environments. We are driven by long term returns to enhance our clients wealth rather than focusing on short term market fluctuations.’
Coach’s comment - This isn’t as philosophy, its a set of outcome-related goals. This may form part of an investment process discussion that includes how to construct a portfolio and manage risk but philosophy needs to describe how to exploit opportunity rather than just lose less. Investment process deals with buying, selling and sizing of individual positions.
Coach’s recommendations - The Good Investment Philosophy should ideally comprise all of the following 6 points. It can be in two versions - a short version for succinct communication and a longer version if more depth is required.
- The reader or listener needs to believe what the asset manager believes in. A philosophy is the ‘why’ behind an approach.
- What is unique, somewhat unique or memorable about the approach of the fund?
- Is the approach to exploiting inefficiency predicated upon some evidence that can be rationally explained
- What about the beliefs link to the personality or values of the portfolio manager(s) that manage the fund. How authentic are they?
- The short version must be summarised in no more than 30 seconds. It should be scripted and understood by all members of the investment team.
- Beliefs can change but tend to infrequently. What can and must change is the ‘what’ and the ‘how’ of managing the fund, that is, the investment process.
These are my beliefs, not facts… but the fact is that asset owners deserve better from the asset management industry concerning their beliefs.