Our rationale is equally personal and professional. After over 30 years working in the asset management business, investing for us is still a fascinating activity, both intellectually and practically. It is what we love doing. At the same time, we have developed over the years a deep dissatisfaction with the direction the industry, or at least part of it, has ended up taking. We believe profound change is needed.
The writer and analyst Charles Ellis, in an article several years ago, proposed the distinction between investing as a “business” and investing as a “practice”₁. Most of what happens in the investment management industry today in terms of activity, culture and behaviour is dictated above all by the commercial needs of the “business”, with a lesser focus on the “practice” of investing, which is the foundation of the profession. We see evidence of this not only in the behaviour of the giants of the sector, but also in those of smaller managers. It is rare for dominant companies in any sector to disrupt their own business models. Constraints arising from size, organisational complexity and the ongoing need to increase assets under management, limit the ability of industry players to change course and innovate. There is, thus, a sort of inertia in the ways the industry players have chosen to compete, largely resorting to offering products very similar to those of competitors and focusing on the levers of efficiency and costs.
Given the 30 years we have spent in the industry, we do not pretend to be completely exempt from the defects which belong to this world. However, time has strengthened in us the desire for a return of greater attention to the “practice” of investing, with the aim of generating the best possible returns as the primary objective of an investment firm. Let’s see why.
The most important thing that has happened in the sector in the last 30 years is what we would call the “benchmark-isation” of investment management. Starting with, but not limited to, the rotation of managed assets into passive or semi-passive products, which has generated a debate focused on commission levels, degree of “market efficiency”, measurements related to the ability of money managers to beat indices and so on. All quite relevant points but which, at the end of the day, do not touch on a fundamental point.
This point being that passive management can’t be a panacea. When all asset classes behave as we would expect in a textbook, i.e. equities provide portfolios with the needed growth component, bonds provide income and “security” and when the correlation between the two works well, that is low or negative, then everything goes beautifully. In this instance, asset allocation works, and you don’t need a lot more because passive management within individual asset classes can be the ‘default choice’.
The problems begin if traditional diversification between asset classes no longer works then passive management offers no solutions. And the scenario ahead of us is exactly that, for two reasons. The first is with interest rates close to zero, and in many cases largely below zero, fixed income ceases to perform its function as a portfolio stabiliser and income generator. The second is that in the increasingly frequent periods of volatility, the correlation between all asset classes tends to rise. In this case, there is a need for truly “active” choices. Something completely different from simple asset allocation rules, like “60/40”, or even from slightly more complex solutions like “risk parity” which involves extensive use of leverage.
If passive is not the solution, even active management, in the sense of traditional management aimed at “beating the benchmark”, fails to give the answers that are most needed. In fact, under the guise of avoiding ‘style drift’, many active managers have decided to play on a ‘restricted’ playing field. Each remaining within the specialised boxes which the investable universe has been segmented into. The result? It is difficult to distinguish between passive and active funds that actually “hug the benchmark” (i.e. there is very little difference). Once again, the problems of traditional asset allocation and lack of effective diversification remain.
In short, benchmarks were built by the asset management industry at another stage in its history and helped to put order and transparency in the product offering. Now, however, there are too many products in circulation and the benchmark has lost its function of guiding choices. We think the time has come for a radically different proposal, and that there is a need for “newly active” investment management .
Where do we start? From the objectives that investment management tries to achieve.
The very stated typical aim of active managers is to produce “superior risk-adjusted performance.” But what does that really mean? Being ranked at the top of your fund category over a 3-year time horizon is a prerequisite for raising new assets. Yet, it is becoming an increasingly elusive goal in a world with thousands of funds chasing the same investment opportunities.
But is “beating the benchmark” really the right goal? Is “risk-adjusted superior performance”, even if achieved, what really interests customers and does it address their needs? The industry has become so short-sighted and focused on pursuing increasingly reduced opportunities for outperforming benchmarks, that it has not noticed its growing misalignment with the concrete financial objectives of savers and “asset owners”.
Each investor, individual or institution, has concrete and distinct objectives. As far as we are concerned, we have no claim to know them better than the clients themselves or their financial advisors. What we do know is that there is a growing need for “goal-oriented”, or outcome-oriented, investment. Wealth managers and consultants can be better supported by investment managers with the offer of a few easily understandable product solutions. For example: achieving a defined stream of returns over time, maintaining a certain maximum level of portfolio risk or the stable distribution of income over time.
In light of the above, our definition of success is different from the conventional one. Our ambition is to set clear and measurable objectives for our funds and we have built an investment process explicitly designed to achieve those objectives. This seems like a more transparent and honest way to interact with customers. It is also a better use of our resources and skills than an excessive proliferation of products differentiated by sector, geography, theme, style, factor, size of companies and so on.
The strength of this approach is that it allows us to focus on goals. This also has very important consequences for everything we do. It means that our proposition and the investment process behind it will be very different from that of most other investment companies.
The first consequence of this approach is that it implies a different way of defining risk. If success is reaching the stated goal for each of our funds, then obviously the risk is the likelihood of (not) achieving that goal. Today, the concept of risk is linked to a series of quantitative measurements that assume the measurability of the same: volatility, VAR, drawdown, Sharpe ratio and so on. But in the end, “risk” for us means the risk of not achieving the goal set for individual funds over the required time horizon.
The second consequence concerns how to achieve the portfolio objectives. We believe that we must be willing to build portfolios that are significantly different from those held by most other investors. The results will be achievable only when you have the freedom, the ability and the courage to include different and unconventional investment ideas, so long as they are instrumental to achieving the objectives.
Being different for us includes looking for investment ideas in less popular market segments and not just traditional asset classes; avoiding the most popular choices; engaging in counter-trend choices; focusing on a small number of positions in which we have strong conviction about their potential. In this sense, the distinction between “traditional” assets and “alternative” assets must also be overcome, in order to build truly holistic and integrated portfolios. What is not part of the “to be different” list for us is an excessive use of financial leverage to maximise returns or the use of opaque, illiquid and unvaluable instruments.
The third consequence of our definition of success is once again personal. We are so convinced of the advantages of this approach that it seems rational and almost “obvious” to invest personally in the funds we manage. This is the only definition of “alignment” that we think is meaningful. But that very few professional managers really put into practice, at least in the field of traditional industry.
To conclude, I want to mention another management giant, David Swensen₂ legendary director of investment of the Yale University endowment fund; “Active management strategies require un-institutional behaviour on the part of institutions, creating a paradox that few can unravel”.
The beauty of creating a new boutique is that we can afford to be “un-institutional”, in defining goals and in the way to achieve them, as we have seen. We are thrilled with what we have started. We believe there is a genuine value proposition for investors in what we have to offer. We hope you share some of the views we have and that this has made you want to learn more and maybe accompany us on the journey. Have a good investment!
₁ Charles D. Ellis Winning the Loser’s Game, Seventh Edition: Timeless Strategies for Successful Investing
₃ David F. Swenson Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment,
Plenisfer Investments SGR S.p.A.
Via Niccolò Machiavelli 4
34132 Trieste (TS)
Via Sassetti 32, 20124 Milano (MI)
+39 02 8725 2960
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