Because sadly, prioritisation doesn’t always mean doing the easiest thing first…. or the sexiest.
In their quest for performance, amateur cyclists, like a number of Trustees and CIOs, can sometimes focus their attention on the wrong things… in this respect, setting the right investment strategy is not dissimilar to cycling and gives rise to the same pitfalls.
We love to focus on the “sexy” and forget about the basics.
What’s Your Average Amateur Cyclist Got To Do With Investment Strategy?
Take your average enthusiastic amateur cyclist. You know the type.
They can usually be found in Cycle Surgery enthusiastically bragging about how their handle bars weigh 20 grams less than yours.
They spend an inordinate amount of time and money buying increasingly lighter parts in a bid to increase performance.
When the truth of the matter is: the vast majority could save a lot of money and vastly improve their performance…. if they got the basics right; and got a personal trainer.
Why You Really Got Outperformed?
That half inebriated hipster with the beard and oversized backpack that whizzed past you smoking a cigarette this morning did so because he didn’t have the Chateaubriand for dinner, not because his bike was more aerodynamic than yours.
The same principle applies to pension funds and the majority of other long term investors.
Your peers didn’t overtake/outperform you because they picked the “sexiest” investment strategy. Or had access to that asset manager with a strategy so complex Einstein wouldn’t have understood it.
No, they more likely overtook you by getting the basics right.
What does that mean for pension funds and other long term investors?
- Frame all your investment and risk management decisions around your objectives. Target no more or less than the required returns needed to meet them, and doing so within a clearly articulated risk budget.For a number of long term investors, this means simplicity over complexity and a sensible degree of diversification. If the return and risk objective can be met by investing in, for example: plain, boring, yet predictable cashflow generating assets like corporate credit (long and short dated) and gilts/swaps, then so be it.
- Hedge out un/under rewarded risk, especially interest rate and inflation risk for pension funds. The arguments have been made ad-nauseam, so please see here, here, here and here.
- Resisting the urge to focus limited governance bandwidth researching that hedge fund manager who regaled you with stories of [25%] year-on-year return with “no risk”, over those delicious canapés at that conference you recently attended (which, by the way, added 5 minutes to your commute the next day).
- Don’t attempt to call the markets. Focus on the most appropriate investment strategy to meet your stated objectives while minimising risk. Nothing more. Leave the crystal ball gazing to asset managers.
When To Focus on that 20-Gram Advantage?
While there is no denying that more complex/riskier strategies have their place, they should be seen as the “sprinkles on the cake”, or the 20-gram-lighter-handlebars… once you look like this:
They help immensely once you’ve eked out as much performance from the basics as possible, but shouldn’t be a priority until then (and shouldn’t even feature unless you really need them!).
So while it is human to focus on the “sexy” and ignore the boring, taking a second to think about the basics first can have a much more profound effect on performance and the probability of meeting your long term objectives.
Then again…. why spend money on a gym membership when you can buy this beauty instead?
We are, after all, only human!
PS: my bike is lighter than yours 
