Clear philosophy on what determines success
Successfully delivering above average returns require very strong views on the fundamental factors that have empirical merit, and have historically demonstrated that will lead to an above average chance of success. This is most commonly referred to as an investment philosophy. We believe that being mindful of severe capital erosion is extremely important in the long run, and that pragmatic, valuation driven investing using small, specialist teams are best suited to sustaining and growing wealth in the long-term.
Diligently managing the harmful effects of capital erosion
Capital erosion has two explicit components, exposing it to too much risk through improper valuation frameworks and/or limited diversification, BUT as important not earning a sufficient return above cash or inflation over time.
This two-fold approach of successful capital management requires flexible investment mandates, limited asset sizes, a deeply entrenched understanding of the continual dynamics between valuations and investor behaviour or psychology and an enduring passion for knowledge about these dynamics.
Smart portfolio construction
This component is the most critical component in ensuring the investor receives the most appropriate return considering the full array of fiduciary factors that need to be considered. The three key components include:
Appropriate diversification and common sense valuation
The key driver of long-term returns is the strategic asset allocation. Simply put, which asset classes form part of the investable universe, what are the key characteristics of each, and how do they relate to each other when combined.
Circle of excellence, delegation of authority and individual accountability
The human brain is constantly facing the primary drivers of greed and fear. This basic instinct has led to the creation of an army of financial experts trying to sell the world on their secret to make a quick buck.
Yet, with the smartest brains, the fastest processing power and the most access to information in the history of investing, the most basic and crucial components of fiduciary responsibilities have been removed from the process. Direct accountability, relationships based on clearly communicated and understood objectives, transparent, relevant communication on decision-making and the most critical of all, individual accountability.
In the highly integrated, continually evolving global economic environment, the use of trusted partners where interests and values are clearly aligned has become the biggest competitive differentiator. We use a clear, detailed and sensible approach to finding partners that meet both our value and alignment of interest criteria, and then ensure we provide the necessary structures to ensure effective monitoring and communication to continually assess compliance with these key requirements.
Key criteria in finding suitable partners
Our pragmatic approach requires an initial screening of our core philosophy across as broad a spectrum of partners as possible. Factors that feature prominently in this initial screen include:
- Firm/Ownership structure
- Individually verifiable, demonstrable track record
- Size of assets under management
- Years hands-on experience
- Compliance with specific measures of empowerment, with key determinant being individual accountability and responsibility
- Overall role and impact of individual versus team
Quantitative and qualitative:
- Consistent, clearly understandable investment philosophy
- Dependable, verifiable references in broader network of clients, previous colleagues and sell-side community
- Application of ESG in process
In order to ensure no performance and quality prejudice to the client, the opportunity set at underlying manager level may require the inclusion of specific individuals who are not necessarily in the most optimal business structure, but does have sufficient skill and freedom to apply their passion for the markets, have historically been excluded from the main stream and have a demonstrable track record from emerging to top tier status.
Risks worth taking
Money management is as much about intellectual ability as it is about perspective and emotional intelligence. This is ultimately reflected in sensible risk management. It is our belief that one of the few differentiators in an increasingly competitive world is sensible diversification and common sense risk management.
We see our role as finding and combining the best of breed specialist managers, and then combining them in a sensible way to achieve clearly articulated, realistic portfolios that will offer highly competitive risk-adjusted returns relative to the peer group median with a similar objective. The least appreciated portfolio management technique is optimally combining the elements of diversification with that of high conviction. A lack of diversification unnecessarily increases risk whilst a lack of high conviction views at critical times reduces return or the ability to outperform. Optimising these two crucial, but often conflicting elements, is essential to long-term investment success.