The CEO's Corner

When I reflect on the process of hiring and firing an investment manager, investors need to take a lot of factors into consideration. They need to balance their liquidity needs and risk tolerance to find investments aligned with their goals. All investment teams have a different way of working and focus on specific parts of the market. Each manager will specialise in different strategies and have time horizons based upon the risk characteristics of their fund. Making comparisons on equal terms is challenging. Also, investors need to pay careful attention to management fees, especially when holding positions for an extended period. Fee drag can significantly impact fund performance, which is why passive index strategies have become so popular. Fees need to be attributed to active risk returns to outperform index funds in the long term. The strength of causation between the strategy of a fund and its ability to generate alpha is another factor. While short term results are exciting, investors need to be mindful of mean reversion, data-fitting, and sample size used to generate the results. Past results are not a good indication of future performance, especially considering the current level of volatility. “Give the best talent the hardest problem to solve.” Scott Evans Building alignment between a financial goal with the skills and specialisation of a fund manager is not a simple task. Each stakeholder is seeking to solve a different problem, creating trade-offs that are hard to manage. Assumptions made during the matching process minimise the downside risk, causing investors to lower expectations. From my point of view, keeping goals limited to financial metrics only plays to the hands of asset managers. Investors can create more leverage if they can articulate the best interests in more detail. They need to be specific stories that are hard to solve so that investors can attract the best talent. Therefore, investors can have more influence over their wealth creation goals by building teams around challenging problems. It is less about determining which asset manager has the best investment fund and more about creating leverage that attracts the best talent. The quality of an investment is the sum of the decisions made to execute on a business plan. Unless the team has the best talent, the ability of an investor to generate the best return will be compromised. If you would like to learn more, come and talk to us. We leverage the latest techniques to wealth accumulation so that you can pursue goal-based investing without the need to lower your expectations.

Ever since I started the journey towards completing the CFA program, my views on the need for investors to have greater engagement has only strengthened. Innovation is impacting financial markets at a staggering pace, creating more opportunities for investors to design a very personalised portfolio. For instance, alternative investments are now becoming popular with investors seeking to have something special in their portfolios. While they offer different characteristics to stocks and bonds, they come with new risks that investors need to manage. Another area that is gaining in favour with investors is high-frequency trading, leveraging algorithms to place a large number of orders at rapid speed across multiple markets. Building a competitive advantage is defined through your proximity to an exchange and the technical capabilities of your trading team. Blockchain and other cryptocurrencies is also an emerging area as participants seek to disrupt payment systems. Many approaches are gaining in popularity like BitCoin, but they all still struggle to deal with the necessary regulatory oversight required for monetary policy. “Prioritise solutions that customers are willing to pay for.” Scott Evans While the universe of investment opportunities is increasing rapidly, the fundamentals remain the same. Focus on investment opportunities that are both high quality and aligned with your best interests. To make this an efficient process, investors need a strong personal mandate to identify the few areas that they want to focus on the most. When I take a step back from all of the change happening, there are many more opportunities than what is available in the market. Businesses need to retool, people need to reskill, and new ways of working need designing. Gaining exposure to such opportunities can give investors something special aligned with their mandate.. Hence, relying on the opportunities defined by financial markets limits the ability of an investor to execute on their mandate. While they offer greater convenience, they come with new risks and leverage models that minimise the upside potential. A more pragmatic approach is for investors to have more engagement. They need to direct the opportunities to focus on and prioritise the few that are the most productive. A personal mandate helps investors with this, providing a very rigorous approach to minimise the downside and maximise the upside potential. If you would like to learn more, come and talk to us. We leverage the latest techniques to wealth accumulation so that you can pursue goal-based investing without the need to lower your expectations.