INVESTMENT PHILOSOPHY
LONGER TERM APPROACH IS OUR CORE
Joint work by CIO Erik L. van Dijk and Nobel Prize Laureate Dr Markowitz forms the longer-term, strategic soul of our approach. But financial market participants, consumers, producers, politicians, central bankers and regulators do all suffer from periods of irrationality as a result of which pricing and valuation in markets can be inefficient. This creates opportunities for arbitrage, but it also leads to more risk than what we would have estimated based on a neo-classical old-style investment analysis. This holds for portfolio investments in more liquid asset classes, but it is even more true when contemplating illiquid, direct investments (private equity, venture capital, operational joint ventures and start-ups, etc.). It is therefore also necessary to link the longer-term structural approach to one that focuses first of all on the short-term aberrations and things that could go wrong.
ASSET ALLOCATION
Our approach does not assume that we are the only good top-down allocator. On the contrary. Using our factor models as screening devices, we also incorporate funds of top asset managers within our solutions. This ensures proper diversification between the views embodied in our top-down models and those of grandmaster specialists that will manage a bottom-up part of the fund solution(s) that we create. Analysis reveals that this approach is especially useful in periods of market confusion or crisis.
DIVERSIFICATION
Our fund solutions will therefore always have ‘diversification’ as a core principle via its asset allocation; the selection of asset managers (active and/or passive; i.e. style allocation); country and/or sector allocation; currency and/or political risk exposure with last but not least Parmenion’s risk management department playing a key role in the overall optimization of our solutions.
BEST-OF-BREED
We will at all time ensure independence and diversification while demanding best-of-breed service from our selected managers. Diversification will warrant that no single grandmaster can dominate our solutions and we will also carefully check their performance. When the latter deteriorates, the manager will be replaced. But as long as our ‘stars’ deliver, we are more than happy to support them via our seal of approval and in communication with clients and prospects (via presentations, research, website etc.).
MAN-MACHINE
In the end pricing in financial markets is not rocket science but the result of supply-demand relationships between human market participants. And these humans will not just incorporate rational-economic factors in their decision process. Research by Nobel Prize laureates like Kahneman and Tversky has shown how important ‘behavioral factors (often biases)’ can be. And not just that: markets are constantly developing, and so are companies. All these elements translate into specific information that will not be incorporated in models. The experienced members of our investment policy committee (IPC) and portfolio management teams in the grandmaster managers incorporated in our solutions do constantly show how the ‘human touch’ can add value.
GLOCAL
Our ‘Glocal’ approach takes this into account: top-down (GLOBAL) analysis of (sub-)asset classes and securities whose pricing is dominated by international factors, combined with the LOCAL analysis of more segregated, domestic investment opportunities. In Emerging and Frontier Markets this approach translates into collaborations with ‘local masters’: asset managers with recognized skills and size in their national markets who enable us to expand our universe of investment opportunities beyond what would be possible with a standard approach.
In the largest of all Emerging Markets – China – we benefit of course from the fact that we are part of GP Group: our colleagues at GP Shanghai provide us with inside/domestic possibilities of entrance in the world’s biggest economy. But in other Emerging Markets our China-linkage is helpful as well.
REAL ASSETS
We do not oppose the use of derivatives or structured products per se, but we will only use them to the extent that these engineered approaches add one or the other element of value over an above what investment in underlying Real Assets could bring. This could be in the form of portfolio insurance/hedging; liquidity enhancement, arbitrage opportunities and/or substantial cost reduction. But we do not believe in financial engineering as the Holy Grail. A solid, broad-based investment portfolio should always be based on an investment in Real Assets with maybe up to 20 percent of the overall portfolio for finetuning purposes invested in financial engineering products.
NEW ECONOMY
But the world is also changing in another, more conventional manner. The faster growth of Asian economies translates into less dominance of Western developed markets. Being member of a China-based group, we are part of this transformation back to a world where Asia leads economically; similar to how things were before the Industrial Revolution gave Western nations their 4 centuries of glory. China has just passed the US as largest global economy and we believe that in 2-3 decades India will also reach a comparable size, to make the New World also geo-politically and -economically a totally different one.
NEW ECONOMY
But the world is also changing in another, more conventional manner. The faster growth of Asian economies translates into less dominance of Western developed markets. Being member of a China-based group, we are part of this transformation back to a world where Asia leads economically; similar to how things were before the Industrial Revolution gave Western nations their 4 centuries of glory. China has just passed the US as largest global economy and we believe that in 2-3 decades India will also reach a comparable size, to make the New World also geo-politically and -economically a totally different one.