12 October 2020
Pythagoras was a clever man: philosopher, cosmologist, musician and mathematician. His famous theorem within Euclidean geometry is one we all learn at school, despite the 2500 years that have now gone by since the man lived. His opinions were so well respected that his disciples across Magna Graecia would appeal to his assertions, rather than to evidence or reason, as a watertight argument. They would simply use the formula “ipse dixit”, literally meaning “he said so”. We, at Momentum, are no Pythagoreans and do not accept dogmatic assertions from anyone, nor do we blindly trust common knowledge. All we trust is evidence and when this is not given to us, the scavenger hunt begins.
One of the more frequent instances where we tend to be sceptic is when researching managers and investment strategies. After all, when someone wants to sell you something, they will often highlight the positives and gloss over the negatives, voluntarily (or not) displaying and explaining in the most propaedeutic way for their single goal: convince you to invest with them. Not accusing anyone of being a liar (which, I am sure, no professional is), this is often the reality of a sales pitch. So, as part of our extensive manager due diligence, we analyse a fund’s holdings in various ways to understand to what extent the portfolio is aligned with the stated investment philosophy and process, while also trying to learn about what has not (yet) been disclosed. We might challenge the investment team based on sector or country allocation, fundamental factor exposures, style tilts or trading activity as we expect all risk exposures and holdings to have a clear, meaningful and coherent explanation. In addition, we discuss specific stocks to understand what drove certain decisions to try and gauge whether past results were due to luck or skill. We have the highest standards when looking for long term investments and the people behind them must be proper stewards of capital.
Another area where we want to be evidence-driven is around ‘common knowledge’, here referring to well-established concepts that many believe being univocally true simply because they have often been so or, worse, because that is what others say. After all, as human beings it is very easy to fall foul of cognitive biases. The first ‘common knowledge’ examples I can think of are: a low risk investor should have more bonds, gold is the ultimate defensive asset, Japanese Yen and Swiss Franc are safe havens, higher risk means higher return etc… All these statements are, perhaps, true on average or have proved to be true in many instances in the past. Does that make them univocally true? No, it does not. Finance and economics are social sciences which evolve with humanity and they are, by definition, non-deterministic systems. This must be taken strongly into account when developing forecasting models, bringing investment ideas forward and building appropriate portfolios for our clients.
Lastly, we strive to practice what we preach. We challenge ourselves and our own research process looking for evidence that our scepticism is indeed useful and value-adding, rather than just a cynical characteristic. Practically, we often try to prove that, everything else being equal, the managers we select perform better than the ones we discard, or that our sophisticated portfolio construction models provide better outcomes than simplistic ones. Every time the evidence goes against our a priori, we learn a lesson and improve our process.
It is not easy to be critical, challenging and sceptical and it is even harder to be so in a constructive, appropriate way. Yet, we do our best to provide our clients with ever-improving investment solutions and means to achieve their objectives, which are our ultimate goals.
