We believe in beta not alpha

  • We believe that asset allocation is the most important decision that an investor or fund manager has to make.
  • Most of the time investors do better by being invested with a bad manager in a good asset class, rather than a good manager in a bad asset class.
  • We don’t pick stocks or play the yield curve.
  • We simply decide how much of a given asset class we want to own. Then we buy the index.
  • There is nothing wrong with beta, provided the index is going up.

We believe in high frequency rebalancing

  • We design tactical asset allocation models, which are rebalanced on a weekly basis.
  • We do not believe there is a magic combination of assets, which can remain more or less unchanged through all the different stages of the investment cycle.
  • Static asset mixes cannot be relied on to deliver a target return with an acceptable level of volatility.
  • This hasn’t stopped academics, consultants and investment managers from trying to find the magical combination.
  • We merely note how much the consensus answer to this question has changed over the last ten and twenty years.
  • We suspect it will change as much in the future.

Diversification does not mean owning everything all the time

  • Billy Connolly, the Scottish comedian, once said, “There’s no such thing as bad weather, only inappropriate clothing.”
  • Capital markets can be every bit as fickle as the weather.
  • Just as we need different clothes for different climates, we need to diversify across different asset classes at different stages of the investment cycle.
  • Diversification does not mean that investors need a fixed allocation to every asset class all the time.
  • This is like wearing a winter coat in July because there are only six months till Christmas…
  • ..or wearing your sandals and your wellington boots at the same time.

We constantly adapt our portfolio to market conditions

  • We say, “There is no such thing as bad markets, only inappropriate investments.”
  • Diversification is a state of mind.
  • What matters is the number of assets an investor is allowed to own, and the frequency with which he is allowed to change them.
  • When it’s warm, wear shorts. When it’s cold, wear a coat.
  • What matters is the speed with which you can change your clothes.
  • There is simply no point in trying to carry your whole wardrobe around with you.

We are sceptical about forecasts

  • Many investors are sceptical about the ability of fund managers to forecast how the investment cycle will evolve. We agree.
  • We believe that the best investment processes start with an accurate description of the present, not an imprecise view of the future.
  • We don’t think all forecasts are wrong; it’s just that there are too many variables which need to be included.
  • To prepare a traditional forecast of the performance of equities versus bonds we would need to forecast a minimum of six variables, including the actions of central bankers around the world.
  • Note too, this is before we try to account for the impact of unknown unknowns such as changes in geo-political risk and technology.
  • Experience suggests that consistently accurate forecasts are beyond the capacity of most investment analysts.
  • For more on this subject, please read James Montier’s classic Behavioural Investing.

Understanding the present is our most important goal

  • The individual forecast may be reasonable, but it comes with a margin of error.
  • Even in a simple model with few variables, the cumulative error in most forecasts makes them too inaccurate to predict the performance of a wide range of asset classes, over anything but the very short term.
  • The greater the number of forecasts, the larger the potential error.
  • The further we look into the future, the truer this becomes.
  • Does anybody really believe long term weather forecasts?

We have a transparent process which delivers clear decisions

  • The most complicated computer programme is an open book compared with the “black box”, which is the average fund manager’s brain.
  • We believe that market prices contain enough information to help investors make well-informed decisions.
  • We have clear rules for interpreting and acting on the data and we understand the limits of our approach.
  • We invest only in highly liquid securities because we can never know when we will need to change our view.
  • Market conditions change all the time; the PRATER process is built to manage that change as smoothly and as incrementally as possible.