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Motivation |
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My
intrinsic motivation has always been to
be one step ahead of the market and to outperform the market,
limit the downside, diminish human interference and remain easy
to understand and implement.
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Six career
defining moments |
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Technology bubble
in 2001 |
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In 2001 I was working as
a portfolio manager for a company that was strategically underweight
in technology stocks. That sector massively outperformed which led
to a strong underperformance by the firm versus the benchmark and
the company’s competitors in the industry.
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The company suffered heavy
asset outflows and pressure increased from clients to make up for
the lost performance and negative media coverage in peer group comparisons.
Finally, these factors forced management to take a business decision
and not an investment decision. All portfolio managers were instructed
to build up technology stock exposure at what turned out to be the
peak of the market. A few months later the technology bubble burst.
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Defining
moment: Develop a concept that is strictly guided by investment
and not business decisions. |
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Positioning after
the credit crisis in 2009 |
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As an alternative investment
portfolio manager, the two worst months in terms of performance
were September and October 2008. I faced large redemptions and client
pressure increased tremendously to limit any further drawdowns.
Management decided that all portfolio managers had to raise as much
cash as possible and would not tolerate any further losses, irrespective
of how oversold the markets were. The market low was in March 2009.
Any portfolio manager wanting to increase exposure to risky assets
was risking his job. An investment committee wanting to increase
market exposure was risking its reputation, more outflows and finally
the viability of the business. |
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Missing some upside was
not an issue. The over-arching issue was not having to communicate
further negative performance figures. Hence, the overall positioning
was far too conservative. This left the firm itself in jeopardy
and a business decision was made to protect it.
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Defining
moment: Develop a concept that is strictly guided by investment
decisions and not business decisions. Important lesson: Business
decisions occur during bull and bear markets. |
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Information overload and functioning
of investment committees |
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Wealth managers build up
departments that focus on macro research, country/sector research,
single stock research, fund research and alternative investment
research. These departments produce extensive and valuable research
material for management and clients. Tactical and strategic asset
allocation decisions are then taken by an investment committee that
meets on a regular basis, taking this research into account. |
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An investment committee
consists mostly of individuals in management positions that have
limited time to digest large quantities of research relevant for
investment decision-taking. Furthermore, these individuals may change
job roles within the organisation, leave or are absent for a number
of reasons. Hence, investment decisions are mostly consensus based
and group dynamics and peer effects can develop. Factors that can
play a role in the decision making process can be political in nature,
due to media coverage, client pressure, company profitability and
so on. Overall, it can be said that the decision making process
of an investment committee is difficult to oversee and dynamic over
time. |
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Defining
moment: Develop a concept that gives clear-cut buy and sell
signals based on a predefined mechanism. |
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Focus on the real performance
drivers |
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Many wealth managers try
to outperform the market by increasing or decreasing the equity
allocation by a few percentage points depending on the market environment. |
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Small portfolio allocation
shifts tend to have a minimal impact on the overall portfolio performance.
Against the client’s best interest, they may generate high
trading fees. Only large allocation shifts have a material impact
on the overall performance. |
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Defining
moment: Develop a concept that focuses on the real performance
drivers or simply speaking incorporates large allocation shifts
- ALL IN or ALL OUT. |
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Benchmark oriented investment
style |
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Most asset managers’
investment style is benchmark oriented and a predefined tracking
error limits any possible out- or underperformance versus the benchmark.
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A benchmark oriented investment
style obliges the money manager to stay invested even during the
worst market environments with low liquidity or falling prices.
The possibility to raise cash is very limited and if the benchmark
falls, the portfolio will also decline. A portfolio that falls 50%
needs to rise 100% to compensate for the lost performance and this
can take years. |
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Defining
moment: Develop a concept that is not benchmark bound and
protects capital during financial crisis. |
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Investment product range |
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Investors are inundated with
investment products, ranging from those that are liquid/illiquid,
transparent/intransparent, structured/plain vanilla, long only/alternative,
open-end/closed-end, listed/not listed, costly/cheap, global/niche
style, top-down/bottom-up style and so on.
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The product range is overwhelming
and an army of marketing people is deployed to contact potential
investors to sell their products. These sales efforts can be very
distracting for professional money managers and result in a large
amount of time, resources and effort expended to evaluate the merits
of competing investment vehicles. |
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Defining
moment: Develop a concept that restricts the range of products
to an absolute minimum. Focus on investment vehicles that are highly
liquid, transparent, cost efficient and offer global coverage. |
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