Having just experienced the thrills of the Olympics, a recent article written by my colleague Kathryn van Dongen is highly topical.
Kath highlights the parallels between athletics and investment management, particularly the power of specialisation, where the athletes who focus on one discipline materially outperform the generalists.
She uses an example from the London 2012 Olympics, when Ashton Eaton won the gold medal in the decathlon event, beating the silver medallist by 198 points.
Eaton had a fantastic competition, winning the 100m and the long-jump events while throwing his personal best in the javelin. However, he only needed to outperform the whole field in three of the disciplines to claim his gold.
In fact, he placed 10th in the shot put and only 22nd in the discus. Notwithstanding his incredible all-around talent, there were significant shortcomings in his performance when compared to winners of each individual event.
Usain Bolt’s 100m sprint was 7% faster than Eaton’s, and Germany’s Robert Harting threw discus 61% further than Eaton did.
How does this relate to investment? We know that strategic asset allocation has the greatest impact on the performance of a portfolio but selecting the best specialists in the world to manage those underlying asset classes is a critical source of alpha, which
compounds with time.
What is a “specialist” fund manager?
A specialist manager demonstrates expertise in their chosen asset class or region. They tend to be based in the countries in which they invest, are familiar with the macroeconomic environment and know the nuances of their asset class. A generalist might invest in bonds as a whole, a specialist in the debt issued by emerging markets only.
An investment process starts with defining asset classes, where you can go broad or
narrow. “Global bonds” is broad. Narrow means separating out global sovereign debt from corporate, high-yield and emerging market debt. Granular (narrow) asset class definitions allow for more effective diversification (you ensure you’re not leaving out particular types of assets and doubling up on others) and finer control over risk and return.
Rather than thinking about global equities as being either developed or emerging, understanding the idiosyncrasies of those underlying economies and markets can make a big difference. There are enormous differences between the United States, Japan and Europe – as is there between English, Japanese, German, French and Spanish.
To get the job done properly, you select the world’s top managers in their disciplines to fill those specific portfolio requirements.
It takes one to choose one
Selecting a specialist requires someone who is a specialist themselves.
Within PortfolioMetrix, we have a large, well-qualified team, with deep investment expertise and a 10-year-plus track record that evidences exceptional portfolio engineering and manager selection abilities.
The manager selection process is thorough, involving multiple meetings, sometimes assessing a manager for years before investing. A global team is also important when it comes to selecting global managers.
The investment team here in London regularly meets with top managers active in or passing through the financial hub.
Relevant skills and experience are needed in selecting product specialists. When we launched our ESG portfolios in the UK market almost five years ago, we increased our ESG knowledge, invested in qualifications for the team and joined the UN PRI.
For advisers looking to free up time by partnering with a DFM, understanding how that specialist knowledge is brought into play by the selected investment managers is very important.
While a gold medal in the decathlon is not to be sniffed at, the world records are set by specialists, not generalists. And, when it comes to investment, everyone wants to put themselves in the best possible position to come out on top.