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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