INVESTMENT STRATEGY
The investment universe is huge, the financial services industry is vast, and the choice of products we can buy to manage our wealth is overwhelming. This can make finding the best strategy for our investment needs quite difficult. Fortunately, the process is made much easier by learning what not to do and concentrating on the things that really matter.
Narrowing Our Focus
Investing directly in assets such as property, private equity, or venture capital funds entails less liquidity, more due diligence, and longer investment horizons. It also means less transparency on costs, higher fees, and larger operational risks, particularly when something goes wrong. Greater risks naturally also come with expectations of greater returns, and as such, investing in private markets is more suited if the aim is to create wealth.
Investing in exchange-traded products, such as stocks, bonds, or commodities, allows us to instantly buy and sell any number of assets or instruments. This gives us more control over our money. It also provides optionality, as we can change our investment strategy at any time, which enables us to better manage market volatility. As such, investing in the public markets is more suited if the goal is to grow the wealth we already have.
We Don't Pick Stocks, We Pick Markets
Common perception equates the success of an investment strategy with outperformance of the markets. However, when it comes to managing our wealth, that does not seem to be a worthwhile endeavour. According to empirical evidence and always being mindful that past performance may not be indicative of future returns, most investment strategies that aim to pick individual stocks have underperformed the broader markets for decades. The question becomes why try to beat the markets when we can simply be the markets by investing in low-cost, passive index trackers?
92%
Pan-European equity funds that underperformed over 10 years (S&P Spiva Scorecard 2023)
17%
Success rate for active equity managers over a decade (Morningstar 2023)
99%
US equity funds that failed to beat S&P 500 over 10 years (Financial Times 2016)
Of course, there are many different markets, and the S&P 500 index has dissimilar characteristics to the FTSE100 or MSCI World. When optimising our client portfolios, we consider the underlying components and size of a particular company, the revenues, the strength of the local economy, the liquidity of the instruments we trade, and the currency exposure. The aim is to create a global market benchmark with thousands of different companies from all regions and sectors.
True Diversification
When equities decline, investing in so-called market-neutral investment strategies represents one of the few effective means for generating returns. Hedge funds seek to capitalise on the relative performance between individual securities rather than relying on the direction of the broader market. They can also be a source of capital when rebalancing our portfolios during times of market adversity.
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Corporate and government bonds can give us yield and diversify our portfolios. It is important to match the time to maturity with the prevailing interest rate environment. Any foreign currency risk needs to be actively managed to avoid return erosion. Precious metals and digital assets (for qualified investors) can offer further differentiation when optimising our client investment strategies.
“If you buy any stock, there is an equal risk of it going up or down. Using technical or fundamental analysis, we may be able to skew that ratio slightly in our favor. However, if we only pick a few stocks, 51% is still fairly random. To make the numbers work, we have to perform hundreds, even thousands of trades. That’s why we are better off investing in hedge funds to generate excess returns, rather than trying to add value with a low probability of success."
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Vishesh Dawar
Investment Manager, joined Blu in 2018
It's Not What We Buy But How Much
According to financial studies, 80% of our investment returns are driven by our strategic asset allocation, or how much we invest in the various asset classes. We can try to predict which of these is likely to do better and allocate more of our capital accordingly. However, this greatly increases our risk if we are wrong.
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We believe the better way to manage our money is to quantify what we can afford to lose and structure our investment risk profile accordingly. By investing in assets that behave differently we gain optionality as we can rebalance our portfolios in times of market volatility. This is of much greater benefit than trying to speculate on things that may never happen.