Our investment approach is simple: We do careful research to identify good value businesses, buy shares when they trade below our assessment of fair value and sell them when we think they have reached their worth. However, what we don’t often communicate is how we go about constructing our portfolios.
Our portfolio construction process is different from the approaches adopted by most asset management firms. Rather than having ‘star portfolio managers’ assigned to individual funds, or a team-based consensus method, we follow a multiple portfolio manager approach. This approach involves a form of internal split funding: The funds of clients in similar mandates are notionally pooled and then divided between portfolio managers, based on their track record and experience.
Consequently, our portfolio managers are not typically responsible for the management of individual funds, but instead, they are each allocated a portion of aggregate mandate assets. In this way, clients receive the weighted performance of the portfolio managers and benefit from a spread of investment ideas.
Each portfolio manager constructs their ‘slice’ of the portfolio from the bottom up, allocating capital to individual securities that have been independently researched and been through a peer review process. Securities are selected from all asset classes permitted in terms of the mandate of the portfolio.
The managers do not pay any attention to the composition of any benchmark; instead they use a ‘clean sheet’ approach, i.e. they make independent decisions about how much of the security to own. They are not influenced by the weighting of a stock in an index or asset class in a benchmark. Portfolio managers focus on selecting those individual securities that provide the most attractive future expected returns for a given level of risk and avoid overpriced securities, irrespective of their size in a benchmark. They also consider how much hedging to use and how much to allocate offshore.
Individuals are fully responsible for the asset allocation and performance of their respective portfolio slices, which tend to be very concentrated as they direct capital to their highest-conviction ideas. In our view, managers can achieve better outcomes for clients if they focus on one or two basic portfolios – rather than many portfolios with differing objectives – as more time can be spent assessing individual investment opportunities.
This multi-manager approach is consistent with our emphasis on individual accountability. By having multiple managers, we are better able to assess the performance of individuals and hold them accountable. It also helps us to achieve scalability and limits ‘key man dependency’. In addition to our long-term efforts to identify future portfolio managers from our pool of experienced investment analysts, we can minimise disruptions should there be changes in the investment team.