Most fund managers have an Investment Philosophy. For some it is little more than a marketing blurb on their website, for others it is their core.
An “Investment Philosophy” for professional fiund managers is required for compliance purposes (compliance with compliance) but it goes beyond that. An Investment Philosophy, whilst it can be updated and amended at any time, provides clarity for all parties, for the RE (Responsibile Entity) of the fund, the fund manager, the investing clients, the regulator, the employees. For many it sets the culture of the fund manager, it defines the funds management process and doubles up as a selling and marketing tool. But the real value of an Investment Philosophy is that it prrovides a platform, injects stability and, for the fund managers in particular, it provides peace of mind that decisions will be made using a defined process through thick and thin (through good times and bad). That process defines what to do and includes everything from setting and communicating goals, to methodology, risk management, roles and responsibilities, operational routines but above all, an investment process that provides peace of mind for everyone involved, from the fund manager to the investor.
You can put what you like in an Investment Philosophy but the main headings tend to start with “Investment Beliefs” with the subheadings:
- Efficiency of markets
- Risk and Reward
- Stock market cycles
- Asset Allocation
Here are some of our thoughts on those issues.
ARE MARKETS EFFICIENT
When Henry and I first joined the stock-market in London in 1982 there was a stock-market floor, orders were put on verbally and recorded in writing. There was no Internet, no email, no globalisation, international phones calls were prohibitively expensive, the HP calculator was the peak of computing and used in space and the personal computer was based on DOS, had 256 kB of memory, and Bill Gates had just said “640K ought to be enough for anybody”. The computer on my desk today has 35.6 million times that much space in virtual memory let alone storage.
The only thing that hasn’t changed since 1980 is that the stock-market continues to be inefficient despite the improvements in technology, globalisation, and communication. We are no wiser when it comes to being able to delude ourselves about stock prices as individuals or as a herd.
But what has changed forty years later is that the stock market enabled “herd” is much larger, is capable of pushing prices to more dangerous excesses, often for long periods of time, and, when recognised, can close or open those inefficiencies in nanoseconds when it used to take weeks.
Net result, we believe the markets and the individual share prices beneath them remain gloriously inefficient at times and are there to be exploited. The incessant advances in technology and speed have not made the “herd” any more astute, if anything it has left them more open to over-reaction and, therefore, exploitation. At Marcus Today we believe there is still plenty of opportunity for a vigilant experienced objective (watch the herd don’t join the herd) manager to exploit the inefficiencies and in so doing achieve better than average returns over the long term.
For an article about EMH (Efficient Market Hypothesis) click here.
THE RELATIONSHIP BETWEEN RISK AND REWARD
Traditional thinking suggests that there is a linear relationship between risk and reward with reward matched in nature by an appropriate level of risk. Whilst this is true in general, it can be an imprecise relationship at times, especially in the stock market which can present excesses at both end of the spectrum including significant risk for nominal reward and reduced risk for a higher reward. Identifying the difference between the two for an investor is simple hard work. The stock market is never about certainty, it is about probabilities and at Marcus Today we work to narrow the probabilities in our favour using a robust investment process developed with a significant investment of time and experience operated by a Team.
See this article for more on Risk v Reward.
IS THE STOCK MARKET CYCLICAL
Traditional and somewhat unimaginative and lazy investment philosophies purport that the markets are always, despite the daily noise, slowly rolling through a predictable cycle that has remained unchanged for decades, a cycle dictated by the economic cycle of the country the stock market represents. On the back of this very simple theory, strategists and commentators attempt to label all points of the investment cycle and in so doing purport an ability to define, predict and “Time” the market. Here is an example of a stock market graphic that attempts to suggest that the market moves in a predictable way and extrapolates that to suggest which sectors you should invest in at which stage in the cycle. The green curve is the economic cycle, the red curve is the stock market cycle which notably anticipates/precedes/predicts the economic cycle.
Whilst such a graphic is used in the monthly reports of many market strategists and economists at large investment institutions to justify, or even drive, asset allocation, sector allocation and stock picking, much of it is a valueless statement of the past. At Marcus Today we understand the correlation with the economic cycle, it is inevitably true at some level, be we also believe that the economic cycle is not so predictable or slow and can, at times savagely depart from this Sine Wave profile, suddenly and savagely. The stock market can also be event driven rather than predictably cyclical, and as such, the investor has to, at all times, expect the unpredictable, not assume this seemingly slow predictable cycle. We need look no further than the stock market impact of the Global Financial Crisis in 2008 and the COVID-19 Pandemic in 2020. This were not cyclical progressions, they were out of cycle events that came suddenly. They were events that disturbed, created and disrupted the economic and stock market cycle.
At Marcus Today we do not rely on the economic cycle to drive asset allocation (the cash versus equities equation for us) or sector thematics at all times. We expect the unexpected and look to protect our investors from precipitous moments that can appear suddenly and “out of cycle”. We do that via a daily debate, constant vigilance and a deep concern for the capital preservation needs of our investors where other fund amangers obssess over little more than their performance relative to the market which can include a feeling of success when they lose you less money in a falling market. Capital preservation is a marketing line for most fund managers. Marcus Today has a history of making strong asset allocation decisions (going to 100% cash sometimes) and part of our uniqueness and value-add is our willingness to do that. Almost no other fund managers can or would do that for their investors. We not only can (our mandate allows it) but we have and will again..
THE CASH VERSUS EQUITIES EQUATION
In our current Growth and Income portfolios we have only two asset classes, Australian Equities or Cash. They are the only two asset classes we are mandated to invest in. It is different in our ETF portfolio which can include international markets, commodities, bonds, cash, property, alternatives and anything esle Australian listed ETFs offer an exposure to, but for the two Australian equity funds there is one asset allocation debate – Should we be in equities or cash. In the last twenty years the Australian stock market has had a significant correction (>30%) every ten years and a tradeable correction (10-15%) every three years. At all other times (in a normal bull market) we intend to be fully invested. Our definition of being fully invested is to be holding less than 10% cash. During those periods the investment committee focus is on individual stock selection based on individual merits often underwritten by sector thematics which aid in timing (the Investmenrt Process is part two of the Investment Philosophy). At other times, when the market looks precipitous, we allocate our investor funds into cash and our investors should know that we address the cash versus equities equation at the top of every Investment Committee meeting every day.
- Markets are inefficient.
- Technology has, if anything, made stock markets less efficient and more exploitable.
- Risk and reward do not have a linear relationship.
- You can narrow risk and push probability in your favour through process.
- The stock market is related to the economic cycle but both can be suddenly and savagely interrupted by out of cycle events. Investors need to expect the unexpected not “sit on the cycle”.
- We re-assess the risk of the markets every day at the top of our investment committee meetings.
- We actively aim to identify and protect our investors from precipitous moments.
- Most of the time we are fully invested.
- When fully invested the focus is on stock picking.
You might ask yourself as an individual investor “What do I believe”. When you have to write it down it does tend to sharpen the mind a little bit.
There are two other headings for an Investment Philosophy, the Investment Process and Roles and Responsibilities. For another day.