About 68% of money managers work in companies with an official and/or published set of investment beliefs, according to a survey on long-term investment beliefs conducted by Pensions & Investments and Oxford University.
That's higher than the 50% of asset owners and 60% of consultants whose organizations use an official set of investment beliefs, according to the survey.
“It's terribly important for managers” to base investment decisions on a clear set of investment beliefs, said Gordon L. Clark, professor at Oxford University's Centre for the Environment, Oxford, England, who led the survey. “The whole logic of their business is premised on being able to articulate beliefs, testing beliefs and being able to revise beliefs in a very uncertain world.”
As a result, more investment managers “now focus on the structure of their investment beliefs, how the beliefs translate into the design of the investment framework and how that framework is executed,” said Rob Bauer, professor of finance and chair of the institutional investments division at Maastricht University, Maastricht, Netherlands. “The more sophisticated investment managers are really trying to have a coherent structure.”
The notion of institutional investors aligning their investment beliefs with those of their external managers isn't new, but the financial crisis has helped investors to sharpen their focus when doing so. “Investors want to know whether managers are going to add value. ... If so, do they believe in the way that those managers will be adding value? It's fundamental manager selection,” said Carl Hess, global head of investments at Towers Watson & Co. in New York.
At Goldman Sachs Asset Management, one of the firm's investment beliefs is that diversification should be across risk premiums rather than asset classes. “I think it's undeniable: An asset class is nothing but a way to invest. What's important is the relationship (between the return stream of an asset class) and its risk factors,” said Charles Baillie, head of global portfolio solutions at GSAM, London. “We have been investing in factor-based models for a long time,”
About six months ago, Mr. Baillie's group introduced a new factor model called Varimax — “a more intuitive and flexible version of principal component analysis, which takes a (portfolio) return stream and decomposes it into risk factors,” Mr. Baillie said. The new model is generally able to explain 90% to 95% of the factors that drive performance, compared to 80% for older models.