Investment process
Do you have a good investment process?
In our experience, a good investment process is a systematic way to make sure that investment decisions are based on facts and methods rather than on feelings and hunches.
We have seen many investments being decided by committee. It may work if the committee members are focused on the job.
All too often, however, it becomes a match where many participants are jockeying for influence instead of creating a good result for the investors.
A good process is based on healthy theoretical principles and on a systematic method that converts opportunity into good outcomes.
Origo Consulting can help you with a report describing in detail how your process works.
Our description process consists in a few comprehensive steps.
Depending on whether the main investment universe is equities, corporate and government bonds or a multi-asset universe, the steps are somewhat different.
In all cases we require access to the investment professionals and not just to a team leader.
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7 steps to investment bliss
Before beginning our work, we request a batch of recent marketing literature and other data. We need to know how you present the investment process to the rest of the world.
No matter the investment universe, we will ask the following kind of questions – in the case of bond markets or multi-assets the questions will differ somewhat. But the logic will be the same.
We proceed in 7 steps, each carefully aimed at understanding different aspects of your thinking, your method and how the two are aligned:
1. Philosophy: so you can outperform? Why?
As a first step, we examine whether your investment process is based on healthy theoretical principles, ie. are there reasons to believe that your investment process will lead to superior results.
Does everybody on your team know why and how their activities should be contribute to long term outperformance?
2. From many to just a few: screening
Then we examine the screening process.
How does your team arrive at a manageable number of potential investment opportunities among the myriads of possibilities in the markets?
Is it a systematic process or is it driven by rumours in the market and tips from friends? If it is a screening process which parameters are central.
If you receive ideas and tips from friends, are they analysed like other potential investments?
3. Analysing a potential investment
Next we analyse the analysis.
How do your professionals select those relatively few lines that make it into the portfolio? Do you follow up on investment ideas that did not make it into the portfolio?
Is there a method that can be described and evaluated?
What are the key variables in making decisions about the investments?
Do all team members use the same key variables? for their decisions.
4. Portfolio construction
Next, we turn to the portfolio composition.
How is portfolio risk handled? Position size? Concentration on certain sectors? Is there a target such as tracking error. What happens if targets are not met?
How are external limitations (such as ESG or cash flow requirements) handled?
5. When is it time to divest?
How is the decision to disinvest made?
Is it based on the assumptions made at the time of investment, or at least on a comparison of the situation now compared to then. Do you set a target price. If not, which metric is used to identify a potential exit point
Or is it all a question of feeling that “now is a good time to get out”?
6. Handling of bad investments
How are “bad investments” handled and what is a “bad investment”?
How does the team make the decision to disinvest?
What is the process?
7. Is the process stable?
Have there been any major changes to the process in the past three years? If so, which ones. How were they decided? How were they communicated to the investors?
Is it possible, based on process changes to understand any systematic changes to the investment outcomes?
We present a draft report where we do point out the strengths and the weaknesses of the current process. This draft will be discussed with the investment team and the team leader.
We finalise the report, based on the facts we have found, not on the basis of what the investment team believe that facts should be. We do not make recommendations on how to move on, unless asked to do so.
The report is yours and you can use it as you find it best for your future work.
If your team has been able to answer all the questions in a coherent and logical way, chances are you have a good investment process.