Better to Be Lucky Than Good?

We attended an excellent investment conference last week Money Investment Alliance focusing on risk and market factors that will affect advisers in the coming year and beyond. The speakers and fund managers at the event covered a variety of subjects ranging from economic forecasts and behaviour to investment structures and styles. The common theme was the fact that there is a great deal of uncertainty about the future and, to paraphrase an American politician, “how best to handle the unknowns that we know as opposed to the unknowns that we don’t know”.

One of the fund managers explained their multi asset strategy and the process by which they selected their managers. It involved extensive due diligence using quantitative, adding up the numbers, and qualitative analysis, do we like the people, to determine which managers in specific sectors they would select to manage their client funds.

They have an impressive approach to what they do and clearly have developed a client fee base that allows them the time and resources to do this. The key feature of what they do, being the identification of investment managers that are achieving results by looking past what the manager says and in to their portfolios to focus on the source of their success.

Stock Picking Vs Asset Class Selection

In many cases the manager’s professed talent for stock picking was discounted in favour of the fact that their investment strategy had directed them to a market or industry sector that is currently or had recently outperformed the average. In fact, on a number of occasions a successful investment manager had managed to pick the majority of the poorest performing stocks in the sector but due to their sector allocation alone had enjoyed a successful year.

This prompted us to consider the fact that many of our subscribers and potential subscribers do not have the time to focus on the efforts of investment managers in such detail in order to achieve results for their own clients. However, this may not be a bad thing, it seems that the key driver of performance is the ability to identify the market or sector, which will in turn position a portfolio to achieve superior returns.

Focusing on this factor alone is sufficient to achieve a significant boost to portfolio performance. At the most simple level if a greater proportion of client funds are being directed to a specific aspect of the economy it is almost inevitable that equities in that sector will rise in price due to the simple application of supply and demand in the short to medium term.

This does raise the question of whether it is better to be lucky than good? We like to think that our effort to remove the noise from the process of selecting investment managers has many merits and intellectual integrity. However, it may simply be that we are identifying where you might be luckier on behalf of your client on a real time basis.

There is no doubt that our analysis will be influenced by the basic flow of funds in to a sector or market. Our reports may simply identify when it is happening and when this trend begins to change rather than understanding why it is occurring in the first place and how long it might be expected to continue.

We shall continue to tell ourselves that it is our strategy and experience that delivers a sophisticated analysis of markets and industry sectors. The truth may be that we are simply identifying the lucky people in the investment community. Either way, does it matter for you or your clients as long as you are able to secure and preserve investment performance on their behalf by capturing these trends at an earlier stage in the process?

Achieving Alpha For Your Clients

There are clearly several steps to take on behalf of your client to improve their opportunity to achieve better investment performance and most importantly to preserve capital to ensure the benefits of longer term compounding.

1.0   Establishing your Investment Universe

Have you got a range of investment opportunities appropriate to your client base? Rather than a fund of fund approach it appears more relevant to secure access for your clients to a range of asset classes such as equities, commodities, fixed interest and money markets. On occasions (remember 2008) all assets classes will trend in the same direction but more often than not you will have an opportunity to recommend a better performing alternative. The following pyramid image provides an idea of how to structure an investment universe.


 2.0   Know where your Investment Manager is Focused

Your investment manager would not be doing his job if he could not explain past performance and sound “cautiously optimistic” about the future. Can you look beyond the headline results and relate their investment focus to the markets and sectors that are performing? Is your investment manager working against the tide or with the tide in terms of asset demand? Can they remove himself from the jargon to tell you clearly where the value lies in their strategy, now and for the future.

3.0   Compare the Alternative Investment Manager Options in Your Universe

It is important to know where your managers are focused. It is also equally important to know where they might be focused. Alternatively, what do you do if your client asks you why they don’t have an investment in their portfolio when their neighbour does? Remember your client will only hear this when the neighbour’s alternative is “going like a train”.

4.0   Asset Class Selection and %Weightings

At the highest level at different times each asset class has experienced extended periods of growth running to many years and decades, which makes the strategic allocation of assets important for the long term success of a client portfolio. (Sinergi example in RED)

It is important to establish a long term benchmark portfolio (BLUE) for your clients taking in to consideration their circumstances and risk appetite. However, your approach to varying the allocation of assets around the benchmark with regard to your clients circumstances can have a significant influence on long term performance.

5.0   Sector or Market Exposure and % Weighting

On a practical basis this is the greatest level of detail that an adviser can reasonably expect to achieve for their clients. However, it can deliver as much in terms of overall results as the appointment of the most effective and successful of investment managers. Accordingly, knowing where your manager is focused is vital and tracking the best sectors is worthwhile in the medium term.

The Fig below shows an extract from Week 25 of our Tact Report and HeatMap Reports which could assist the Adviser through this difficult process.

We are not suggesting that you chase each and every trend as it changes. This is more than likely to be impractical and expensive. However, knowing where your investment manager is focused and what your alternatives are puts you in a position to take action when you know it is needed. Alternatively, in a monthly savings plan there may be greater scope to adjust the allocation process very effectively for and on behalf of your clients.

6.0   % Weighting  and Stock Picking

Stock picking can be spectacular in terms of getting it right. We all know the story of Apple shares meteoric rise in the Noughties and possibly Sage Accounting in the UK in the nineties, but how many of us would have put the house on it at the beginning? In terms of return on time and effort this is best left to the dedicated discretionary manager.

Compare each of these stocks currently in the S&P 500 with the Sinergi Proprietary modelling overlayed on each Chart:

Fig 1 Alpha Natural Resources  (-46% Ytd )

Fig 2 Whole Foods (+39% Ytd)

The two stocks are drawn from the same market (S&P 500) with significantly different results.  Accordingly, when you make your sector decisions it is worth looking at your manager’s strategy in this area. Over exposure to individual stocks can distort your clients results either positively or negatively. We are not saying that you should be picking active or passive investment vehicles but it is important that once you have picked your asset classes and sectors that the effect of your manager’s strategy is clear.

For further imformation please contact:  Keith Reid


Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.