A key characteristic of the underlying active managers we invest with is that they all follow a well-defined and consistently applied investment philosophy, supported by proprietary fundamental research and analysis. In particular among equity strategies we focus on those that are managed with distinct investment styles that result in focused exposure to particular style factors such as value, quality or momentum. Portfolios that are consistently biased towards one of these factor groupings have been seen to outperform the market over the long run through capitalising on mispricing that results from the behavioural biases of other investors.
The apparent drawback of these strategies is that the returns are usually lumpy with long periods of underperformance being followed by rapid outperformance when the style is in favour. However, because these styles each result in significant variation in the underlying portfolio composition, they tend to do well and badly at different times. This allows us to create a diversified basket of style specific strategies that should preserve their various inherent tailwinds while reducing the volatility of the returns series to create a more efficient returns profile. This is illustrated in the graphic below using a simple equally weighted combination of the three main style categories; the volatility of returns around a global equity benchmark is vastly reduced this way while outperformance in maintained.
Having this clear vision of the types of managers we want to invest with enables us to effectively filter the sizeable universe of strategies down to a subset of strategies that have the greatest future performance potential. It is then up to us to identify which strategies will be successful, and we have an advantage in this regard because we have managed portfolios consistently in this way for over ten years.