Our Investment Philosophy
Our investment philosophy is a collection of ideas, principles and beliefs which serves as a guide to our decision-making process at both the macro and micro levels.
These beliefs may be summarized as follows:
Changes in asset prices are driven by shifts in investors’ expectations (subjective beliefs) about the realization of risk factors. Hence, forecasting asset price changes is tantamount to predicting shifts in investor’s subjective probabilities about the occurrence of risk factors.
The aforementioned remark implies that in order to form an educated guess about the future direction of asset prices, we must be able to foresee changes in market’s expectations about the potential realization of risk factors.
To this end, we must build a bridge between market’s subjective probabilities and currently available information about fundamentals, such as real economic activity, inflation, debt dynamics, monetary policy, capital flows, fiscal spending and corporate profitability in both advanced and emerging economies.
Asset allocation at a given point in time refers to the decision of how to divide your investment capital among major asset classes, namely equities, fixed income and cash (or cash equivalents). Put differently, asset allocation determines the weights assigned at each period of time to the major asset classes mentioned above.
These weights may be fixed or changing over time. If the weights are time varying in an active way then we have a situation referred to as Active Dynamic Asset Allocation. In such a case, an important question presents itself, namely what is the criterion for changing the allocation between the current and next period.In our view, this criterion cannot be based on anything else but on the forecast of how market expectations on risk factors are about to change. If these forecasts turn out to be correct, then gratifying portfolio performance inevitably follows.
ADAA should be designed in a way that ensures discipline, transparency and efficiency. Investment decisions should be guided by “our heads” not “our hearts”. Avoiding standard investors’ fallacies (usually referred to as “representative heuristics”) such as “extrapolation bias”, “myopic short-term perspective”, “gambler’s fallacy” or “herd behavior” is a necessary condition for solid portfolio performance.
All portfolios must exhibit sufficient degree of diversification at all times. Diversification has always been and still is the most efficient way of mitigating portfolio risk. A well-diversified portfolio is comprised by asses whose returns exhibit low correlations.
These correlations, in turn, are not static but dynamically evolving. There are periods in which these correlations are low (in which case the portfolio is well-diversified) and others in which the correlations are high (in which case the portfolio is poorly diversified). Hence, monitoring the correlation regime that is likely to prevail over our investment horizon is of paramount importance for controlling and mitigating the overall portfolio risk.
Our active investment strategy is guided by our strategic views about how a portfolio should be diversified at any given point in time. given the current and anticipated economic conditions. To this end, we have constructed three benchmark portfolios, with each one of them corresponding to a different level of risk, namely low, medium and high risk.
These benchmark portfolios may be thought of as representing our “average” or “long-term” asset allocation view. In the short-term, we are allowed to deviate from the benchmark portfolios (always within a pre-determined range) with the direction of this deviation (over-weight vs. under-weight) being dictated by our forecasts about changes in market expectations.
Scientific Research and Academic Insights in the field of investing are valuable sources of ideas and information in the act of portfolio construction. Research and Analysis are necessary for every successful human endeavor and investing is no exception. However, theoretical rigor is sterile if it does not blend with practical experience.
We firmly believe that the interaction between academic understanding and pragmatic judgement is the most promising route towards successful portfolio management.
There are two standard ways of thinking in making an investment decision.
The first, usually referred to as the top-down approach aims at assessing the outlook of an economy, market or sector. For example, if the economic outlook of US is assessed to be better than that of Europe, more capital is allocated to US equities than European ones.The second approach, namely the bottom-up approach, focuses on the prospects of individual companies and tries to pick up the stocks which are likely to be mispriced.
Each approach, used in isolation, is inefficient compared to a unified approach that allows correspondence between top-down insights and bottom-up awareness. In the context of this approach questions such as “are the optimistic forecasts for the US economy consistent with the beliefs of company managers about the future earnings and sales growth of their companies? Such a cooperative approach that enforces “checks and balances” between top-down and bottom-up thinking is designed and implemented in the form of our.
Understanding risk is necessary for controlling it. Risk is a two-faced concept, namely the product of the probability of a risky event times its consequences.
Gambling depends solely on chance. Investing depends on skills, which in turn depend on many years of practical experience combined with analytical intelligence.
Asset management performance should be measured and evaluated on an ongoing basis. The results, then, must be used as a feedback to achieve continual improvement.