We see literally hundreds of fund managers and investment strategies a year; which do we think are most likely to be successful in 2015? We really see three important things to focus on: risk, diversification, and freedom. Let’s take each of those in turn.
- Risk. This might sound obvious, but as we see it, the behaviour of market risks has been very different in the period since 2009 compared to what we would expect over longer time periods, and this needs to be factored in to risk processes. Managers and strategies with an advantage in this area really need to be able to step back from current conditions and see investment risk in a much wider context, answering questions such as: what is the absolute level of credit risk in a portfolio, and are investors being compensated at the current price?” or: “ what could a return to more dislocated levels of volatility – and/or correlation – do to the portfolio?”
- Diversification. Strategies based on getting one or two big calls right can do well if these calls come to fruition, but it is a big risk. History tells us that consensus views on, say, interest rates can seem really sensible at the time, but have a terrible track record of forming historically. Much better to recognise that any manager, no matter how good, will get some calls wrong. But if the portfolio is correctly diversified and positioned sized accordingly, then one bad call should not make or break the year’s performance. It is probably tougher – and let is face it, a lot less glamorous work – to deliver performance based on a gradual accumulation of correct calls as opposed to hitting the “ball out of the park” in any one theme, but it probably delivers a better investment strategy over the longer term.
- Freedom. One theme of the post-2009 investment landscape has been the fact that many simple, benchmark-focused strategies have actually performed as well as broader and less constrained approaches. Going forward, it is more difficult to see this continuing to be the case. Opportunities probably will exist, but they are likely to be in more select areas. An investment strategy that has the ability to uncover opportunities in a variety of areas, or rotate asset allocation in a meaningful way, is probably more likely to be successful than one that is always anchored to being invested in certain sectors of the market.
It is certainly going to be a fascinating year watching some of these themes play out, and I look forward to returning to this topic later in 2015.