With an increasing focus in the market on how we are all building our client portfolios, it is incredibly important to have a strong and defendable investment framework in place. This investment framework consists of, but is not limited to, how we structure our investment committee, what our APL looks like, and where we get our research from. However, the foundation for this framework must lie with a clearly defined and articulated investment philosophy underpinning all our investment decisions.
At its essence an investment philosophy reflects a broad set of investment beliefs. It underpins our investment strategy and process and ultimately is our ‘source of truth’ as it gives a frame of reference around all investment decisions.
Your investment philosophy should provide transparency and ensure consistency in your decision making and help mitigate behavioral biases such as chasing last year’s winners. Typically, an investment philosophy will be underpinned by some sort of empirical evidence supporting the philosophy. An example of this may be a belief in active management or an investment approach based on a valuation discipline.
There are a number of different approaches that can be taken when articulating your investment philosophy, but for many with a diverse client base, keeping it simple is the best solution. Think broadly about what you are trying to achieve across your client base, irrespective of whether they are wealth accumulators, retirees or high net worth clients.
- Do you believe in diversification?
- Do you believe that market beta is the primary driver of returns?
- How do you define risk?
- Do you believe markets are inefficient/efficient?
Answering questions such as this will help build the framework for what will become your investment philosophy. For anyone that has a more focused client base (for example; predominately retirees), you can start to ask questions around liquidity, income and timeframes.
Importantly, once you have established a set of principles that you believe in, ensure that you match this belief through your investment portfolios. For example, a philosophy based on protecting portfolios from downside risk and volatility, cannot be implemented via an index based solution.
It is always important to ensure that your investment philosophy does not remain a pretty plaque on the wall of your boardroom, but instead forms the basis for every conversation you have with your clients, as it should be clearly reflected in your recommended solutions. This is especially important in difficult market environments as a clearly articulated investment philosophy will be the reference point for your client education process.