Asset Manager Review
Karl Leinberger, chief investment officer at CORONATION FUND MANAGERS does not think that there is any single decision-making model that is the holy grail for fund management.
“There are many differing models that have been successfully employed over long periods of time.
“In the recruitment process at Coronation, we look for strong, independently-minded people that want to be part of a team. This is not a culture that is easy to get right, but we believe that it is one that results in more robust outcomes in client portfolios. We find that teams that make decisions without individual accountability suffer from group-think and decisions that lack intellectual courage.
“At the other extreme, individuals who work in a vacuum miss out on the benefits that come from leveraging off other skilled individuals with a different view on the matter at hand,” says Leinberger.
says the company has invested in a well-resourced globally integrated team of investment professionals across seven focussed capabilities. Open debate across asset classes and geographies is encouraged, as we believe critical analysis and information sharing ultimately leads to the best-quality investment decisions and outcomes for our clients.
Nevertheless, as a multi-specialist investment business, each investment capability operates independently with its own strategy leaders and aligned teams of analysts and portfolio managers; they are encouraged to stay true to their investment philosophy and process, which ultimately results in diverse portfolios that are aligned to their investment objectives.
“They are not trying to chase the best returns in the market; rather, each of our strategies has a very clear articulated process and objective which guides investment decision-making. We believe this discipline delivers the best risk-adjusted outcomes over time.
“Having these independent teams also allows for a speedier and more effective decision-making process rather than the cumbersome houseview approach, so that teams can implement their ideas into client portfolios on a nimble basis and curtail ‘implementation risk’.
“Finally, we believe portfolio managers should be completely focussed on managing money and not tasked with the difficulties of having to run a business,” says Phillips.
says the company’s approach to decision making is methodical and quantitative in nature and starts with the risk benchmark. Our process has remained constant over time.
“At Prescient we define risk as the probability of not meeting the client’s investment objectives. To ensure that the client objectives are met, it is important that we understand what these investment objectives are. The core of our philosophy is to maximise returns with emphasis on benchmark or capital preservation and the management of downside risk. Our challenge is therefore to construct a portfolio with superior risk/return achievements relative to the benchmark against which it is measured.
“Prescient’s process starts by defining a risk benchmark as well as performance target. The risk benchmark describes the minimum return under adverse market conditions. The portfolio will be structured, i.e. position deviation from the benchmark will match the risk tolerance to ensure that at worst the return will meet the risk or minimum return benchmark. At the same time, should the market condition favour the position direction, the client return will be maximised given the risk tolerance or benchmark.
“The portfolio is managed actively and a number of quantitative techniques are used to generate returns, including duration management, yield enhancements via credit exposure and risk management strategies, where these strategies are designed to provide downside protection. Overweight positions will be taken in the securities offering best risk compensation and underweights will be in securities with poor risk compensation. Importantly, the size of the position deviation will be determined by the clients risk tolerance with smaller deviation taken where risk constraints are tight and vice versa.
“Underpinning the process is a direct focus on risk. Risk is quanti- fied in the day to day management of the portfolio. Prescient will calculate the outcome of the portfolio under different interest rate scenarios. We can thus ensure that the portfolio return will be maximised should Prescient’s view be correct, however, the positions are of such a magnitude that underperformance is limited to match the client’s risk benchmark should rates move against us. This can be specifically tailored to the client’s needs, i.e. by setting a risk benchmark and ensuring that position size is limited so that the portfolio always delivers to the client’s expectation and above,” says Toms.
says the company believes that the most important investment decision to make is to get the entry price of an asset purchase right. If this is not done effectively the portfolio faces the potential of a permanent loss of capital which can never be recouped with future good performance.
After getting the entry price right the manager must have the patience to wait until the full value of the asset is realised. The manager must appreciate that this could in some circumstances take some time.
“Our approach to investing has evolved over time to deemphasise the impact of macro forecasting as it has been shown to be unrewarding in the long run. We also focus more on the long term as short term market moves have a high element of randomness in them,” says Booth.
says the company’s investment philosophy is valuation oriented looking for opportunities that are trading at prices below what it thinks they are worth.
“Often these are uncovered in areas of the market which are overlooked by others or where sentiment is negative. To be successful in this approach, we believe investment decisions are best made by individuals, and not committees. These individuals should be independent minded and have the confidence – based on the strength of their research - to be different and to take full responsibility for these decisions.
“We also believe that clients benefit from a spread of investment ideas from a number of decision makers. Portfolio managers are therefore not assigned to manage a single portfolio. Instead we notionally pool all client funds into a consolidated portfolio, which is split among specialist portfolio managers. In this way, clients benefit from the blended view of the best ideas of all our portfolio managers and it reduces the key-man risk for specific individuals,” says Lamb. says typically, large asset management firms have strict criteria to ensure managers sing from the same hymn sheet. Constraints include approved stock buy lists and specific tolerances for allocations relative to a benchmark. Boutique firms typically differentiate themselves via investment style.
“Integral’s objective is real portfolio growth (not relative to benchmark) over investment cycles. Our style is neither value nor growth. We use both a top-down (macro) and bottom-up (stock selection) approach.
“We won’t hold a position lower than 2% and believe a 7% position starts to add risk and requires careful monitoring. Sector diversification is critical to risk management and we feel comfortable with high cash positions in times of market stress.
“Our approach typically suits investors who are creating and preserving wealth for the long term and institutions that recognise the importance of conviction investing and the ability to limit losses when markets fall, preserving a larger capital base from which to grow when markets rise,” says Warburton.
says the company has continued to focus on the goals of clients.
“We constantly review and measure whether they are on track to meet these goals and make changes to the portfolios we manage on their behalf. This requires constant and clear communication back to the trustees in a manner that can be clearly understood.
“Globally, the traditional approach is to focus on a ‘pot of cash’ at retirement. This does not provide members with the necessary information to make informed decisions with regards to how on track they are for their retirement.
“We seek to maximise the likelihood that members have sufficient assets accumulated at the point of retirement that will enable them to receive income each month sufficient to meet their expenses,” says Levitan.
says the company tries its best to focus only on objective factors that are likely to affect future cash flows when making investment decisions.
“In the process, we try to avoid overdue emphasis on macroeconomic and other high frequency data and are careful not to be influenced by market sentiment. In addition, while taking into consideration team views and engaging in robust debate with investment team members, we practice individual decision-making and accountability. These two approaches are underlined by a long-term perspective and – as already referred to above - emotional detachment,” says Floor.
says asset management firms usually follow a narrow, star portfolio manager approach on the one hand or, on the other end of the spectrum, follow a team-based multi-counsellor approach.
“We believe collective wisdom can best solve complex problems. As evidenced by the recent Brexit episode where political experts got it wrong, we believe that a teambased approach best solves cognition problems. Since investment professionals are also prone to the psychological pitfalls so often attributed to the man/woman in the street, we believe a team approach allows us to aggregate diverse opinions, drawing off different skill sets and experiences to solve real world, complex problems in conditions of uncertainty and under time pressure, when stakes are high.
“Over time, our team based approach has been solidified by recruiting individuals who can contribute to the collective while being able to think independently. Hence the need for diversity of thinking in teams can be reconciled with better outcomes and innovative ways to solve complex investment problems,” says Rassou. says Early in my career, I favoured quantitative analysis and technical optimisation tools; essentially, number-crunching until the data delivered a supposedly ‘correct’ call.
Today I prefer a balanced ‘four R’s approach’ based on regime, returns, risk and relative positioning.
Regime entails an understanding of the economic environment – where money is flowing.
Returns is focus on expected returns based on valuations, tempered by understanding that some valuations remain bizarre for extended periods, often influenced by the regime; for example, the global search for yield and its effect on asset pricing.