These investment principles we adhere to when investing clients’ capital
1. Our goal is not only to be better but also to be different
One overriding principle dominates our investment philosophy. We aim to not only be better than the competition but also to do things a little differently. Some people say we focus on niche investments, whereas others say we are very much about esoteric investment strategies. We prefer to think of ourselves as different.
Over and above everything else, our portfolio construction is driven by the six structural megatrends we have identified, and the investments we make must fit with one or more of those megatrends.
We believe that, for many years to come, the road to attractive returns will be by exploring other risk factors than beta risk, for example illiquidity risk. By far the most cost-effective way to take beta risk is by investing passively; hence we have no desire to invest with investment managers who take significant amounts of beta risk and charge high fees for that privilege.
We also note that most investors who invest in alternatives focus on mainstream alternatives, but we don’t see the point of investing in, say, long/short equity if returns are no better than indexing, fees are much higher, and returns are far from uncorrelated.
One implication of all of this is that equities do not account for a significant share in most of the portfolios we manage, but that doesn’t imply that we don’t invest in equities at all. If an attractive equity opportunity presents itself, where the beta risk has been eliminated or at least substantially reduced, we can most definitely invest.
2. We always act responsibly when investing
When investing, we always try to think of the wider implications and aim to invest responsibly. Having said that, many labels are used when talking about responsible investing. Some call it sustainable investing, whereas others use the term ESG (environmental, social and governance) investing. We prefer to call it responsible investing.
All those terms mean something slightly differently but, at the end of the day, it is all about acting responsibly when investing. Consequently, we are members of the United Nations’ PRI (Principles for Responsible Investment) and follow PRI’s guidelines.
Whether one subscribes to one or the other term, it is a rapidly growing trend; an art which is no longer reserved for the world’s largest pension funds (who were early trendsetters). Today, even smaller private investors pay attention, meaning that it has become a proper alpha instrument rather than just a way to demonstrate political correctness.
3. Even our approach to fees is alternative
We invest mostly in alternatives and our approach to fees is also alternative, meaning that our desire to do things differently has resulted in a very pragmatic approach to fees.
Our starting point is that we don’t have a rule book on fees. It is one of the great advantages of being a small firm. Our ability to structure a model that our clients are comfortable with makes long-term success that much more likely.
We obviously need to earn a reasonable fee, but we don’t believe in the model that has tainted the entire industry more recently – fat management fees and fat performance fees. Far too many alternative investment managers have earned more in fees in recent years than their clients have earned in returns, and that is a no-go for us.
4. Clients have different objectives. Thus, they must be treated differently
It goes without saying that all of our clients are treated fairly, but we don’t believe you can paint everybody with the same brush. An obvious example of that would be how differently our clients define the term “attractive returns”. Some regard a relatively modest but highly predictable return attractive, whereas others may take a very different view. The definition we most often come across is based on the Sharpe (or Sortino) ratio; i.e. returns must be attractive relative to the amount of volatility taken.
At the end of the day, we take a pragmatic view and follow the client’s guidelines, which is why two investors who seemingly follow virtually the same investment strategy may not hold identical portfolios with us.
5. Strategies we invest in must fit the bigger picture
In short, the fact that an investment opportunity at first glance comes across as a great opportunity is not always enough for us to invest. Our approach to investing is very disciplined, where we operate with a triangular investment model. At the bottom, where most of the capital is allocated, we invest in strategies that benefit from at least one of the six structural megatrends we have identified.
Around those core holdings, we allocate to what we call core complements. It may be an investment strategy that benefits from a high illiquidity premium; it may be a secondary investment opportunity that can be acquired at a discount to NAV, or it may be something entirely different.
At the very top of the triangle, tactical opportunities also affect portfolio construction. If we are bullish on, say, USD/GBP, we may allocate more to USD-denominated investment strategies for our UK-based clients than we would otherwise do.
6. Volatility risk, at least at the portfolio level, must be asymmetric
Investing is all about generating attractive returns whilst limiting the downside risk. The disciplined investment approach referred to above forms a critical part of our risk management process, as the megatrends that drive our portfolio construction are all virtually set in stone; hence, the timing factor becomes the principal unknown.
Because of that, as long as the investment managers we have appointed do a respectable job, we almost always benefit from tail winds when investing.
7. Assets and liabilities must be matched
In our opinion, too many investors don’t take this risk seriously enough. However, investors who went through the turmoil of 2007-09 know only too well not to take this risk lightly.
Rule # 1 in our little rule book about risk management begs us never to underestimate this risk factor. It is indeed the single most important lesson learned from the mayhem of 2008.
8. We always assume we have missed something
We recognise that even the safest investments carry risks which can hurt quite badly. Recognising that, and constructing portfolios accordingly, will save us (and our clients) from a lot of pain.
9. We constantly try to learn from past mistakes
Only fools focus on their successful investments, but there is a lot more to be learned from those that went wrong. We spend a considerable amount of time on the mistakes we make, and we certainly make mistakes every now and then, although we try our very best to avoid them.
10. Nothing is unsolvable
Time and again, we come across investors who are prepared to throw in the towel. That problem cannot be solved, they say. We simply don’t believe in giving up. There is (almost) always a solution to be found if you try hard enough and long enough.
Sometimes it is necessary to think out of the box but, in all humility, we think we are quite good at that. Our entire business is built upon a foundation of thinking out of the box and, therefore, we refuse to give up until we have found a solution.