Investing with conviction

Why difficult markets demand a high-conviction approach.

Even after a decade-long bull market, investor confidence remains brittle, as we experienced in the last quarter of 2018. High-conviction investment strategies can help you maintain confidence and stay the course amid both calm and choppy markets.

Just as an individual with conviction in the intrinsic value of their home would not likely sell if a slide in house prices is expected, investors with conviction would also hold on. This is particularly important during times of both turbulence and exuberance – when a low-conviction investor may trade with market sentiment as a guide, and when a confident investor may find opportunity.

The reward? A resilient portfolio that manages risks – especially when markets are volatile.

High-conviction investing means hitting the mark

Investor Round Table hosted by Citywire: Watch how investors, fund researchers and our Portfolio Managers Matthew Benkendorf (Global Equity) and Mark Holman (Fixed Income) share their views on investing with conviction. How do these investors assess the benefits of high-conviction?

 

What is a high-conviction approach?

High conviction is a style of active management that is expressed through portfolio construction.

Without deploying a consistent high-conviction approach over time, it is hard for any manager to beat the benchmark or passive fund equivalent for their target sector. Investing with conviction means sticking to your investment style through the cycle – which allows you to weather uncertainty.

How can you measure conviction?

High-conviction strategies share certain characteristics, such as

  • More concentrated portfolios – measured by number of holdings
  • Strong understanding of, and comfort with, investments – measured by longer holding periods
  • Style-consistent performance – measured by performance behavior in up- and down-markets over multiple market cycles

You will witness high conviction not just in the outcome, but also in the investment process.

High-conviction managers place a great deal of value on their research and security selection capabilities, allowing them to take meaningful positions.

High-conviction managers can outperform over time

High conviction does not mean that portfolio managers are right all the time. But by having the freedom to focus on an area of expertise, with little or no focus on market indices, portfolios are constructed to be resilient through the economic cycle. Keeping a relatively low number of positions allows managers to capture more stock-picking opportunities. In turn, the positioning rationale is clearer, which reduces the complexity of the portfolio's management and makes for more robust decision-making.

Taken together, this allows investors to stick firmly to their strategy, capturing opportunities in the markets consistently over the long haul.

"Conviction is about having confidence in our philosophy and approach – repeatedly, no matter what. Equally important is our demonstrated ability and track record of carrying it through."

Matthew Benkendorf, CIO, Quality Growth Boutique

How to invest in high-conviction managers

Portfolio managers develop their conviction by repeatedly applying their investment philosophy, while adapting it to the current market environment. What do investors need to observe when considering a high-conviction approach?

 

Bring some patience

Investors with a short investment horizon and sensitivity to short-term underperformance may not be comfortable investing in high-conviction approaches. Empirical evidence suggests that long-term investors are up for a much better experience.

Know your facts

Many managers show selective evidence, such as a high active share, to declare themselves as high conviction. But that does not necessarily make them high-conviction managers. Does their investment philosophy and process evidence independent thinking?

Ask difficult questions

High-conviction managers can be wrong, so you want them to acknowledge this. It is important for a fund manager to be able to understand their faults and explain the drivers of their performance.

 

After a long period of positive and correlated asset returns across the board, rising interest rates and lower liquidity are leading the markets to take a more aggressive view on the pricing of risk. In this environment, dispersion of performance across the markets is likely to rise – favoring high-conviction, active investors.

 

"There is absolutely no doubt in my mind that a high-conviction approach, combining top-down and bottom-up attributes, can lead to material outperformance against the benchmark compounding year after year."

Mark Holman, CEO, TwentyFour Asset Management.

 

More return dispersion gives good opportunities for investment managers with conviction

In 2018, the bulk of the sectors in global equities were negative, with the more cyclical sectors experiencing the worst declines. Active equity managers with conviction see declining markets as an opportunity to buy good companies at discounted valuations.

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Vontobel Fund - Global Equity

Quality Growth Boutique Global Equities

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Share class Currency ISIN Valor NAV YTD As at
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AI EUR LU1121575069 25693957 198.63 0.99% Sep 24 2020
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B SEK LU0979498168 22522410 267.88 1.51% Sep 24 2020
B USD LU0218910536 2140207 344.09 3.95% Sep 24 2020
C USD LU0218910965 2140211 322.08 3.50% Sep 24 2020
G USD LU1489322047 33901045 162.69 4.90% Sep 24 2020
H (hedged) SEK LU0971939599 22340335 169.78 2.12% Sep 24 2020
H (hedged) EUR LU0218911690 2140210 171.73 2.40% Sep 24 2020
HC (hedged) EUR LU0333249364 3813702 281.34 1.92% Sep 24 2020
HI (hedged) EUR LU0368555768 4289761 203.46 3.10% Sep 24 2020
HN (hedged) EUR LU1550202458 35324119 143.89 3.02% Sep 24 2020
HS (hedged) CHF LU2090086880 51360787 103.33 - Sep 24 2020
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N USD LU0858753451 20093228 221.55 4.58% Sep 24 2020
S USD LU0571091494 12235870 262.94 5.33% Sep 24 2020
Vontobel Fund - TwentyFour Strategic Income Fund

TwentyFour Asset Management Flexible Bonds

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AH (hedged) USD LU1380459609 31903318 113.72 2.64% Sep 24 2020
AH (hedged) EUR LU1380459518 31903287 104.10 1.55% Sep 24 2020
AH (hedged) CHF LU1380459435 31903272 102.06 1.34% Sep 24 2020
AHI (hedged) EUR LU1325139290 30515147 100.46 2.02% Sep 24 2020
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AHN (hedged) EUR LU1734078311 39472004 98.70 1.90% Sep 24 2020
AQ GBP LU1695534591 38576552 99.25 1.85% Sep 24 2020
AQH (hedged) Gross USD LU1695534674 38576554 99.44 2.64% Sep 24 2020
AQH (hedged) Gross HKD LU1695534831 38576560 96.28 2.77% Sep 24 2020
AQH (hedged) Gross SGD LU1695534914 38576564 96.82 2.48% Sep 24 2020
AQH (hedged) Gross EUR LU1695534757 38576557 94.67 1.56% Sep 24 2020
AQHG (hedged) EUR LU1816229899 41604558 98.74 2.24% Sep 24 2020
AQHG (hedged) USD LU1816230046 41604564 104.16 3.30% Sep 24 2020
AQHI (hedged) USD LU1331792082 30671527 110.24 3.17% Sep 24 2020
AQHN (hedged) EUR LU1325135033 30514904 97.40 2.05% Sep 24 2020
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AQHNG (hedged) USD LU1451580523 33337877 109.68 3.31% Sep 24 2020
AQN GBP LU1322871630 30445597 102.65 2.30% Sep 24 2020
AQNG GBP LU1695534328 38576548 99.59 2.41% Sep 24 2020
G GBP LU1322871713 30445634 124.57 2.44% Sep 24 2020
H (hedged) EUR LU1551754515 35380297 110.07 1.41% Sep 24 2020
H (hedged) USD LU1695535135 38576584 112.78 2.67% Sep 24 2020
HG (hedged) USD LU1717117896 39078859 114.74 3.26% Sep 24 2020
HG (hedged) EUR LU1717117623 39078855 106.94 2.05% Sep 24 2020
HI (hedged) USD LU1325144027 30517180 130.06 3.14% Sep 24 2020
HI (hedged) EUR LU1325141510 30515149 117.58 1.88% Sep 24 2020
HI (hedged) CHF LU1325143136 30515275 115.44 1.81% Sep 24 2020
HN (hedged) USD LU1767066431 40236077 112.96 3.14% Sep 24 2020
HN (hedged) EUR LU1734078584 39472006 106.03 1.92% Sep 24 2020
HNG (hedged) EUR LU1325133921 30514756 118.33 2.06% Sep 24 2020
HNG (hedged) USD LU1695535051 38576583 115.33 3.19% Sep 24 2020
HR (hedged) CHF LU1650589929 37575133 107.31 2.03% Sep 24 2020
I GBP LU1322871390 30445160 123.54 2.33% Sep 24 2020
N GBP LU1322871556 30445263 123.37 2.31% Sep 24 2020
NG GBP LU1322871986 30446217 124.30 2.41% Sep 24 2020

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