In the crystal light of Bermuda, things are sometimes a little clearer than they seem in our corner of Mayfair. One of those things is the idea that not every investment solution has to be complex to be effective.
That rather appeals to me as I think managing a portfolio of equities offers adequate complexity. Like most fund managers, I have managed various mandates but have one, which I instinctively prefer. This approach isn’t terribly susceptible to fashion and, like the clothes of a well-dressed man, isn’t terribly noticeable. It is hidden, we might say in plain sight.
My work sits within a relatively new, independent house established by investment managers who have worked together for a couple of decades. To that competency has been added the experience of former colleagues who have worked in the distinct investment community in Bermuda. Peregrine & Black Investment Management is licenced by the FCA in London and the Bermuda company is licensed by the Bermuda Monetary Authority so that, depending on client requirements, the principal investment managers can provide the effective management of assets in either jurisdiction.
The academic analysis, however, will still tell you that the best total return investment over most periods is the domestic equity market. The Barclays Equity–Gilt study is reported to show that over 118 years UK equities have returned 5.1 per cent per annum (over inflation) while technically more secure long-dated gilts have returned only 1.3 per cent and cash rather less. The pattern is the same for the US, and analysis by the world-renowned London Business School team, sponsored by Credit Suisse, has previously said very much the same.
In a post-Big-Bang generation we have instinctively expected dramatic and less vanilla answers than “domestic equity.” Actually, we are in a post-investment theorist-Harry Markowitz world in which markets appear to be definable and predictable. Since we have required all our aspiring fund managers to study these theories, they tend to be treated as a rule book and their unrecognised limitations can give a false sense of having captured mathematically a complex proposition. Dynamic methodologies often use as their template necessarily backward-looking models so, consciously or otherwise, these strategies are frequently founded on idealisations. They are now so significant to generating stock price moves that they have taken over the market from genuine investment.
A parallel development has been the use of passive strategies for broad asset-class exposure. Let’s call a spade a spade: these passive methodologies have come into wider use because they are cheap and only seem likely to underperform the index by a bit more than their fee level. This is in contrast to active managers who not only “get it wrong” with reasonable consistency but also charge distinctly more for someone to come in every day to do the analysis. Equity managers routinely get overconfident about how much price moves are driven by the underlying truth about a company. The market’s reaction to a piece of news or a trend is often difficult to guess. Allowance must be made for that unpredictability and, on balance, diligent analysis and cool judgment can deliver meaningful out-performance, even if it sometimes doesn’t seem so.
A passive fund is not even attempting the evaluation of a company, but merely following mechanically the moves in each company’s size in whatever index the strategy has been shackled to. Who is doing the evaluation to set the price and fulfilling the societal function of rationally allocating capital so that good companies get backed while bad ones are shunned? It is both active investors with medium and longer horizons and dynamic strategies which are very much more interested in larger, rapid moves. Passive funds multiply up major price moves over many trading days as they continue to blindly re-adjust their positions until the ripples on the pond die away. So, share price moves tend to get larger as core investors go unnoticed, dynamic strategies drive prices and passives multiply those moves.
In contrast to both dynamic and passive methodologies we at PBIM have a couple of fairly conventional equity strategies. A simple selection sits within our broad investment offer. My pet strategy is a diversified, weighting-constrained approach – lots of nuance and small alterations to keep the portfolio a little ahead of the market each year. Nothing too aggressive nor, indeed too glamorous. Not something that’ll sound terribly swanky when you’re chatting at the bar, but an approach of an attractive simplicity which employs both active stock selection and a disciplined structure.
This was once fairly commonplace but is now rather unusual. If you want high-conviction braggadocio, this isn’t for you. If you want good sense from real, experienced fund managers, it just might be.
Peter Bodycombe is fund manager at Peregrine & Black Investment Management Contact Oliver Pearson-Lund, Chief Investment Officer opl@peregrineblack.com
