Starting a new year is a lot like hiring a new manager: optimism and hope abound! But let’s be honest, you might expect a little post-hiring cognitive dissonance. After all, you could have sifted through over 12,000 active strategies before making a decision![1] Fortunately, there’s a time-honored method to help reinforce confidence in your choice and we built our brand refresh around it last year.
The answer is not mathematical. It’s philosophical.
You might be surprised to hear that from Intech®, but if you want to better portfolio efficiency, investment philosophy is a great place to start. Diversification is essential to efficiency and a philosophy sets the stage for diversity.
Unfortunately, manager investment philosophies have been whitewashed in recent years. They’ve become marketing mantras that all sound the same. How many ways can you really “exploit market inefficiency” – if it even exists? What’s worse, philosophies contradict each other. One manager is buying what another is selling. It’s no wonder passive investing sounds appealing!
So, what do you look for? A manager’s philosophy should evoke purpose – a raison d’être – and it should address three key questions:
- What’s their alpha source?
- Why do they think it’ll persist?
- How do they capture it?
The answers to these questions reflect a manager’s ability to find opportunities where other managers do not and add a diversity to your portfolio. Performance should serve as empirical evidence of a manager’s philosophical claims, not as the claim itself.
Just ensure a manager holds a truly distinctive investment philosophy and embraces it with passion. No manager is successful 100% of the time, but understanding what inspires each will help you filter through a multitude of managers, aid portfolio construction and offer conviction around your decision. But, perhaps most importantly, it may allow you to hold onto the virtues of optimism and hope we all cherish!
Happy New Year!
[1] Number of active management strategies in the eVestment database as of 2017-12-31.
