We have introduced an explicit value-oriented approach to our investment process. We think multi-asset value investing is both new and original (a search of the term and variants of it on Google yields zero results).
"Unlike success, risk is about the destination not the journey"
Value investing traditionally is associated with investing in equities, but we have applied it to the management of multi-asset portfolios and their associated components, namely tactical asset allocation, equities selection, fixed income selection and alternatives selection. After all, the principle of value investing is to buy things cheaply, something that can be applied to anything, whether tactical asset allocation or grocery shopping. In practice, we apply a value approach by looking at current yields of various instruments (debt, equity, funds) and asset classes and asking the simple question, “are they materially higher than they should be?” in the context of various other factors such as future income growth, leverage, inflation, and monetary policy. If the answer is “yes,” we will invest. (In the case of things that don’t yield anything such as commodities, we would look at valuation based on inflation-adjusted prices, but they’d have to be well below historic averages for us to be interested). We think this approach is one that is both simple and effective.
It is also an approach in which risk management is deeply embedded. We think the most important investment-related risk is the risk of permanent loss of capital, not price volatility. Important risk is thus much more closely related to solvency risk, something that can be more effectively avoided by assessing intrinsic value. Market risk on the other hand is something that much of the time we seek to be actively exposed to as a source of return. Unlike success, risk is about the destination not the journey. One should be able to tolerate and recover from the odd bit of bumpy road. It’s driving off a cliff one should avoid.
Published in Investment Letter, August 2015
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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