At the heart of our investment philosophy lies the conviction that both ‘Return’ and ‘Risk’ should be analysed in a structured and integrated manner. Lots of investors get addicted to high returns and underestimate the risk factor. On the other hand, those who do acknowledge this factor but fail to properly analyse it will miss out on great opportunities. After all, a thorough analysis of risk in its various dimensions will bring you valuable data.
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 other regulators all do 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.
Man and machine
The Markowitz-Van Dijk model is embedded in our long-term investment opportunities in such a way that our approach has become a ‘man-machine’-focused structural way of looking at investments.
The ‘machine’ part is a quantitative system based on state-of-the-art econometrics, game theory and behavioural finance. The system incorporates big data over an analytical window of more than 50 years covering more than 100 countries across the globe.
The ‘man’ part consists of an internal and external component. Internally, it encompasses the disciplined way in which our analysts and portfolio management team relate our system output to new market and other relevant short-term information in their day-to-day activities. Deviations from the machine are allowed but only to an extent based on a proven track record of excess returns linked to earlier deviations. On top of this, we also include an external ‘man layer’ by incorporating valuable information from our best-of-breed selected investment managers within this process.
Adding the short term sauce to our longer term main dish
This is what the Cerutti Risk Budgeting model, our second piece of proprietary IP, is doing. When possible, we will undertake longer term investments with short-term financial instruments (e.g. options and futures) helping us neutralise these short term aberrations and risks. In case these are not available (or too expensive), we will reduce overall risk for our Group and our clients through proper diversification, timing and collaboration with best-of-breed specialists and our local partners.
Combining global with local
Especially the collaboration part is not to be underestimated. Too often do we witness parties assuming that ‘they know it all’ and they will therefore handle certain situations in a similar and almost mechanical way time-and-again. However, those situations are only seemingly comparable in a complex world where correlations do go up, but where local and sectoral differences are still of huge importance. That is why we are convinced that our glocal (global and local) approach is crucial.
The 7 key pillars of our Investment Philosophy
1. Real Diversification
The most effective way to control ‘risk’ in many of its dimensions. It was and is the basis of Markowitz’ Modern Portfolio Theory and still the only free lunch in the financial world.
2. Asset Allocation
Most people spend their time worrying about finding the right picks within asset classes. While it is in fact the allocation decision between those asset classes that explains the differences in risk-adjusted returns. The Markowitz-Van Dijk approach covers more than hundred countries and half a dozen asset classes and therefore provides us with a solid strategic backbone in all economic climates.
3. Real Assets
Provide investors with a risk premium versus inflation and cash over time. In other words: ‘financial engineering’-style products and strategies will only be used to the extent that they help control risk (when there are no alternatives available), with proper asset allocation, picking, and best-of-breed partner selection creating the basis for good investment results in our real asset universe.
4. Markets are not efficient
This is already true when investing in developed countries (especially when opting for small-, mid- and micro-cap investments), but even more so in emerging and frontier markets. This will create opportunities, but it will add risk as well. Capturing the opportunities requires proper risk management and collaboration with best-of-breed partners with local knowledge.
5. Emerging and frontier markets are here to stay
The world is changing. The old ‘leaders’ will lose market share vis-à-vis the new ones. China is just the beginning. But beware: cycles in these markets will be more erratic and volatile for many years to come. The only answer is a long-term strategy supported by state-of-the-art risk management and local partnerships.
6. Local Players add value
Our investment approach is a top-down one (global component), but we are more than happy to collaborate with local, ‘best-of-breed’ partners. We sometimes spend as much time finding these partners as we do finding direct investments. In other words: we will never re-invent the wheel or assume we ‘know best’. This is what we call our ‘glocal’ approach to investing.
7. Scalable Approach and Ongoing Learning
We believe that it is necessary to focus on ‘scalability’ to ensure that investment projects will reach the right size. Working on project A will create experience that will be helpful when initiating project B. Like Mark Twain once said: ‘History does not repeat itself, but it rhymes’.