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Matter of principles

Investment management is a crowded, highly competitive field in which everyone is trying to be different but the real opportunities for innovation are rare. Most of them turn out to be, at best, reinventing the wheel. At worst, they are blind alleys encased in the jargon of the times, which leave the client worse off and disillusioned.

The requirement from clients is simple – they want to have their cake and eat it. This means above-benchmark and peer group returns when markets are rising and absolute returns when they are falling.

Most of the accepted wisdom of the moment stems from the traumatic experience that equity investors encountered in the 2000/2003 bear market.

This presented a wonderful opportunity to managers. Clients were prepared to sacrifice a lot of upside for downside protection, yet nearly all asset classes were appreciating in value. Never before had it been so easy to excuse poor investment performance so easily – the manager was just “being cautious.”

Diversifying portfolios across different asset classes has become accepted wisdom and modern technology has made managers expert at analysing past performance in any number of clever ways. Unfortunately, the supply of capacity in genuinely uncorrelated asset classes is totally insufficient to meet demand. Past returns derive from periods in which much smaller pools of capital were chasing finite opportunities and there is no chance of them being repeated. In an increasingly globalised world, different asset classes are becoming increasingly correlated. This process of convergence resulted in bumper returns but “modern” multi-managers are totally unprepared for a world in which all assets decline together.

Our response to the changing fashions in multi-manager investing is to focus on client returns and to stick to some simple principles. The asset class investors are desperate to avoid, equities, is experiencing a golden age of returns. The most obvious of asset classes has become almost a contrarian bet. Investors need to capture those returns while they are available because when they are gone, we could be faced with a world in which all asset classes offer poor returns.

We are happy to invest in funds which are long only, hedge or closed-ended and to look at all asset classes from currencies to private equity but we do need to understand exactly what the manager is investing in and how returns are made.

Max King is co-fund manager of Investec managed growth


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