Two decades of money management: Lessons from the frontlines

Reflecting on two decades of money management is like flipping through the pages of a well-worn book, each chapter filled with lessons learned, strategies refined, and the ever-evolving landscape of investments. Managing money is not just about numbers and charts, it’s about understanding the broader picture, adapting to changes, and continuously learning. Here are some key learnings from over 20 years of managing Fund of Funds unit trusts.

The early bird catches the worm

The biggest ally to any investment is time, due to the powerful force of compounding. As fund managers, the best guidance we can share with investors is to start saving as early as possible. Beginning to invest in your mid-twenties versus mid-thirties has a material impact on your ultimate retirement pot, with that additional 10-year period potentially tripling the size of your end investment. This can make a significant difference in terms of your ability to retire with peace of mind and the required monthly annuity income.

Strategic asset allocation: The bedrock of long-term success

One of the most significant learnings in money management is the importance of long-term strategic asset allocation. This disciplined approach involves setting a target mix of asset classes based on an investor or fund’s risk tolerance, time horizon, and financial objectives. Strategic asset allocation is crucial for achieving long-term investment goals by managing risk and optimising returns over time.

The more diverse the asset classes you can invest in, the better. This diversity provides more levers to navigate various economic scenarios. Equities, bonds, property, commodities, and cash are well-known asset classes, spread both domestically and globally. Within these broad asset classes, further diversification into sub-asset classes like government, corporate, and high-yield bonds, infrastructure, small, mid, and large-cap equities, and developed versus emerging market equities is beneficial.

Adapting to an evolving investment landscape

The investment landscape is ever-changing, and traditional sources of investment alpha, such as stock picking and market timing, have come under increasing pressure.

As a result, generating excess returns has become more challenging, necessitating adaptation and evolution in asset allocation models. Diversifying into other asset classes such as private equity, alternatives (including various hedge fund strategies), private debt, real estate, infrastructure, and commodities has become essential. Leveraging data analytics and machine learning to identify patterns and opportunities, and integrating Environmental, Social, and Governance (ESG) factors to align with long-term value creation, are now crucial areas to be aware of and use to your advantage when allocating and managing investments.

The rise of Passive Investments

Over the past decade, there has been a significant increase in the use of passive funds within portfolio construction. This trend has been driven by several factors. Firstly, many active managers have struggled to deliver returns that beat the index. Secondly, the low-yield environment in financial markets until a few years ago pressured wealth planners to reduce the total investment costs for clients. From a multi-manager perspective, I  believe that both active and passive strategies have a role to play and should be combined appropriately when constructing overall portfolios. There are certain sectors and asset classes where passive solutions work extremely well, and conversely, areas where active management adds value. It is important to get this mix right to allow a fund to benefit from both passive and active fund management.

Costs and liquidity: Two key components

Over the years, I’ve learned that keeping a close eye on costs and liquidity is vital and often underestimated. Higher costs reduce the total return on a multi-managed portfolio. While investors and fund allocators may feel that short-term costs are immaterial, saving 50 basis points (bps) a year in costs, compounded over 20 years, makes a significant difference to total returns. Negotiating the best possible fees for your underlying investments and blending them with some passive holdings can help achieve a lower overall cost.

Liquidity is equally important. The Global Financial Crisis (GFC) 15 years ago is a stark reminder of how many investment strategies struggled to meet redemptions, leading to side-pocketing or closures. Matching the liquidity of the investment with the fund’s dealing terms is crucial. A wise person once told me, “Things are perfect until they are not.” Over the past two decades, I’ve seen several large funds perform well for years, but when markets dislocate, causing fear, panic, and mass redemptions, mismatched dealing terms and liquidity can lead to trouble. A prime example is the daily dealing UK domiciled property funds in the early 2000s, which directly held UK office and retail properties. Facing large redemptions, they had to sell these properties at massive discounts over several months, despite offering daily dealing terms.

Do the hard work upfront, then allow time to reap the benefits

Spending time doing thorough research upfront and getting comfortable with the fund manager to whom you want to entrust your capital is important. Solid investment and operational due diligence are critical for peace of mind. Be comfortable with the investment team, their processes, and controls. Experience has shown that investors often do not give their selected managers the chance to deliver long-term outperformance, switching too soon at any sign of underperformance. All managers, however good, go through periods where their investment performance dips, sometimes for 12 - 36 months. Resilience is needed to stick with the manager and allow them time for their skill to shine through over a full market cycle. More than 50% of the managers in our Fund of Funds range have been with us for over 10 years, and a handful for over 20 years. They have been the best performers over time.

Continuous monitoring with a long-term mindset

Effective investment management requires continuous monitoring and adaptability to a changing market environment. Adapting investment strategies in response to dynamic market conditions can help mitigate risks and capitalise on opportunities. This may involve rebalancing the portfolio, shifting asset allocations, or incorporating new investment themes and strategies as needed. Equally important is maintaining a long-term investment mindset. Different multi-managers have varied approaches, but I’ve found that consciously avoiding short-term fads or trends and focusing on long-term fundamentals and valuations is the better route. Most managers who try to time markets over shorter-term horizons get it wrong as often as they get it right.

Relationships and experience

I have come to realise that one should not underestimate the value of strong relationships with various underlying fund managers, product specialists, and relationship managers. Having quick access to fund managers when insights are needed is invaluable. Building long-term relationships with fund houses allows for negotiating enhanced fee arrangements due to their better understanding of the long-term nature of one’s investments. Years of experience as a multi-manager are also advantageous. The knowledge gained from managing money through various economic cycles and global events like the GFC, regional conflicts, COVID-19, rapid spikes in inflation, and quantitative easing is invaluable. As a multi-manager, one learns the importance of sticking to processes, not reacting emotionally or impulsively, remaining calm during market volatility, and the benefit of patience over time. Behavioural finance coaching by  wealth planners is also crucial during market turmoil and is essential for better client outcomes.

Conclusion

Reflecting on two decades of money management reveals a wealth of insights that can guide both novice and seasoned investors. Fund management experience, coupled with a long-term investment mindset, will enhance investment outcomes for investors. In a world of rapidly advancing artificial intelligence and machine-generated outcomes, there is still space for the human touch and insights. These two worlds should be seen as symbiotic rather than in competition with each other.