We like to find managers who have a track record of success. We look at how they’ve performed in different market environments and economic cycles. Ideally you have a 10-year track record, though we’ll look at investors with five.
But there’s a real danger in relying on performance — it’s just a starting point. We also look at their willingness to underperform over short or medium time periods if their process is out of favor. We look at whether they’re sticking to what they know and believe in and what has been successful over time. (emphasis added)
This is a hugely important point, and one our Chief Investment Office Raphael Mennicken made recently in a post on what constitutes a good investment model on our platform from our perspective:
I’ll define a “good” model as one that performs better than what can be expected, given its strategy and also consistently sticks to its stated strategy. To assess this, it’s important to understand the expected return of the model’s strategy.
For example, some of our managers run equity strategies that typically amplify market movements in both directions – on the upside and the downside. So when the broad market is down, one should fully expect to see performance for such these models fall as well. In such cases, negative performance does not mean the model is “bad” – it was explicitly correlated to broad market performance.
Conversely, some models follow a strategy that makes them more resilient to broad fluctuations in the equity markets. This can mean that when equity markets are rallying, these models will rank low in terms of returns and may underperform models that are more closely correlated to market index performance. But again, that does not make these less correlated models “bad”.
In the end, a manager and strategy are worthy of your consideration if they have the integrity to clearly define their strategy – what it is and what it isn’t – and stick to it through thick and thin. And it’s the thin periods that make this most evident.
Image: mahalie
