Investment philosophy

It’s crucial for investors to have a clear understanding of their objectives in order to achieve favorable outcomes. Investors should establish clear return objectives, risk tolerances, liquidity needs and time horizons — designed to address the broader needs of their stakeholders.

It’s imperative to design a governance framework that supports delivery of the primary objective, recognizing that the investor may have differing secondary objectives.

Aligned governance processes drive investment performance. Particularly in times of crisis, strong governance becomes even more crucial. Investors should regularly review their beliefs, objectives and risk tolerance, considering different timeframes to ensure alignment with their goals. 

Clear decision-making, accountability and transparency are key. Operational inefficiencies and poor implementation can erode returns and expose investors to risks and potential losses. Managing the gap between intention and execution is critical to achieving long-term outcomes. Investors should periodically review operational processes to ensure efficiency and robustness.

Planning is paramount. An investor can benefit from employing techniques such as stress-testing and “fire drills” — and using the findings to shape an approach to liquidity budgeting, rebalancing processes and implementation efficiency.

Establishing clear accountability for results promotes disciplined decision-making and risk-taking. The incentive structures of the various specialist internal teams and external managers employed must collectively align with delivering the primary objective 

Effective stewardship and engagement with companies, policymakers and stakeholders plays and important role in value  creation through the deployment of investor rights and influence. Clear stewardship objectives, meaningful escalation mechanisms in response to unsuccessful engagements, and the feedback loop between stewardship activities and portfolio positioning (including, in some cases, exclusions) are all key to effective stewardship.

Stewardship, which involves using voting rights and engaging with companies, can be enhanced through industry-based collaborative initiatives that promote the sharing of public information among investors. This sharing of information helps support each investor in making well-informed decisions. 

Performance typically depends most on the decisions made related to asset allocation strategy. This highlights the importance of risk budgeting processes that capture other drivers of return and risk (such as manager alpha and dynamic asset allocation) and are tailored to an investor’s specific objectives and risk tolerances.

Investors are more likely to achieve successful outcomes when they invest with conviction, focusing on risks where they deem the expected return to be commensurate with the risk taken, and minimizing exposure to risks they consider to be poorly rewarded.

Diversification builds portfolio resilience by reducing exposure to individual asset classes, investment ideas or managers. However, the expected portfolio construction benefits may be predicated on historic relationships that don’t hold in some historic environments and plausible future scenarios. It’s important to understand, challenge and stress-test any assumptions being made. Using a range of tools and techniques (including assumptions-based stochastic modeling, backtests and scenario analysis) can help reduce single or framework model risk.

Risk is multidimensional, and a client’s context — including their time horizon — matters. Volatility is not the only measure of investment risk. For many clients, tracking error versus the market or failure to generate sufficient income or long-term growth is more important.

More widely, asset value is not the only source of risk: liquidity, leverage, operational, regulatory and reputational risks are among the wide range of risks that may need to be taken into account.

Considering the risks associated with climate transition, natural resource challenges, and socio-economic developments as part of an investor’s risk management process can assist in positioning their portfolio across time horizons. This proactive approach enables investors to adapt to potentially changing market dynamics as a result of these trends.

By strategically allocating assets across different classes, investors can potentially optimize risk and return, diversify their portfolio and capture market opportunities. This long-term approach maximizes potential returns and manages risk, leading to value creation over time. 

This can be achieved via a bias towards higher-quality alpha sources that have shown to be the most repeatable and evidence-based. Skilled managers who demonstrate observable characteristics and follow approaches that set them apart from the average can add value over time, especially in less efficient markets.

However, even the most skilled asset managers experience periods of underperformance. Success — which should be defined and measured — requires understanding, conviction and patience. Past performance is not a reliable indicator of future results. Fees should align with the ability to generate excess return. 

The advantages of private markets include the potential for higher returns and value creation via a broadened opportunity set with unique characteristics. Key to achieving this is relationship-building with managers, thorough due diligence, risk management and alignment of interests.

While strategic asset allocation is important for long-term objectives, a static approach may not capture all return-seeking opportunities because asset prices can deviate from fair value. Implementing short- to medium-term asset allocation views can generate improved performance. 

However, dynamic asset allocation requires skill, insight, fortitude and risk tolerance. It adds risk relative to a strict strategic asset allocation target and may not always be successful. Careful implementation and appropriate client governance are necessary for effective dynamic asset allocation.

Market inefficiencies in pricing transition risks, as well as the development of new technology and solutions to sustainability challenges across developed and emerging markets, can create opportunities for investors to capitalize on the transition to a net-zero carbon, nature-positive and more equitable world.