When I start working with a new client, one of the first things I typically do is revise their statement of investment philosophy.
In my opinion, everything, from investment process to long-term portfolio management should flow from a simply written, single sentence, easily-remembered statement.
Too often, a firm’s investment philosophy is a rambling, multi-paragraph buzzword salad that confuses “philosophy” with “process” and “management.” When this occurs, it presents asset management firms with two primary dangers:
- When philosophy, process, and portfolio management are lumped together with no distinction between them, it suggests a lack of precision with regard to how a manager thinks about the investing side of their business.
And if the way in which an asset manager thinks about and describes its investing platform lacks precision, a natural question is: what other parts of their business also lacks precision and clarity? - A muddled statement of philosophy will not help a firm to differentiate itself (in a good way) from its competitors.
For these reasons, asset managers need to think carefully about what core principle or two drives the entirety of their investment management operation.
Here’s a representative example of many of the investment philosophy pages I come across in both pitch books and websites of prospective clients:
Founded in 1990, we specialize in equity asset management for institutional clients. We offer multiple index-based, passively-managed equity strategies to institutional investors. We measure success against any number of client-selected benchmarks.
What we see here is a mix of profile and portfolio management strategy, with nothing philosophical at all.
Here is a more effective investment philosophy statement:
We believe passively-managed, index-based approaches to equity investing offer investors the best opportunity for consistent, long-term investment returns.
It is simple, clear, and, importantly, easy to paraphrase.
The most convincing arguments are the ones easily remembered. So when managers have an intricate, highly detailed research, issue selection, and portfolio management process (or one that is simple and straightforward, for that matter), they strongly benefit from having clear, simple-to-understand philosophy about what constitutes a good investment underlying them.
