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Working at MASECO – Part 1: The Investment Strategy

Getting rational and staying rational

When I was asked to write my first blog for MASECO, I considered all the topics central to the company. I started by reading through previous blogs, but realized quickly that those topics have already been well covered. Instead, I decided to write an ‘open diary’ about my experiences here to date, to hopefully provide some useful insight into MASECO.

In this first blog, I’d like to share my experience of adapting from a traditional asset management approach, to MASECO’s evidence-based approach.

I recently joined MASECO with over five years’ experience in wealth management, having previously been part of an upstanding traditional establishment. There, we ran portfolios in a conventional manner, and aimed to add value for our clients through asset allocation, manager selection and stock selection.

When I joined MASECO I was of course aware of passive investment strategies already, but I was new to evidence based investing and companies such as Dimensional Fund Advisors. Upon learning more, my rational side readily bought into the concept. It was like realizing I had taken a wrong turn down a bumpy country road, and finally found a map with the route to the highway.

I consider myself a rational being by nature, but I found myself asking questions, which many clients surely do as well – in particular when they are shopping around and being promised brilliant managers and tailored portfolios. I had already accepted the superiority of MASECO’s strategy, but to my surprise I still had conflicting feelings and found excuses in regards to my own portfolio.

Is the market really unpredictable? My market analysis makes perfect sense, surely my strategy will win over the long run? I will just wait for my predictions to come true and then move the portfolio? Is it possible that diversifying and capturing market returns is really the best strategy?

All these questions were contrary to my better knowledge and the evidence, which led me to develop a “stay rational” checklist. Hopefully it will serve as a reminder to anyone who finds themselves in doubt:

  1. The numbers don’t lie. A large majority of active funds under-perform by definition (index minus fees = average return).
  2. Psychological biases have a large negative impact on average investors’ portfolios, one major study found that over the last 20 years, the average equity fund investor has under-performed the S&P 500 by 4.3% annually, and the average fixed income fund investor has under-performed the Barclays Capital Aggregated Bond Index by 5.5%*!
  3. Picking ‘winning’ securities may be the most exciting way to try and out-perform the market, but it is a very unlikely way to add returns to a portfolio.
  4. S&P500, or the FTSE100 are generally not good benchmarks for most investors. Sophisticated benchmarking and asset allocation are fundamental elements of successful investing and can significantly improve results.
  5. Managers that consistently outperform exist, but they are as hard to identify as a winning security and possibly rarer. Research has shown that past performance of a manager is not a good guide to future performance**.
  6. In our experience, the MASECO investment philosophy resonates with experienced market professionals. This is very telling and the best reassurance.
  7. Our investment philosophy frees up a significant amount of time and resources, enabling us to focus on the things that really make a difference for our clients.
  8. If you achieve net performance in line with, or just over a really well developed benchmark, you are among the very elite of investors.

The bottom line is that evidence based investing is not about giving up and just capturing the return of the S&P500 or FTSE100. It’s about spending a lot of time on identifying the factors that make a difference, building a composite benchmark in line with your risk profile, and then designing smart portfolios that capture return premiums, while you stand back and let the portfolio work for you.

Tor Flonaes
Investment Adviser

 

Sources:

*DALBAR Quantitative Analysis Investor Behaviour 2012 (QAIB)
**CRSP data provided by the Center for Research in Security Prices, University of Chicago

 


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