The Essence of a Disciplined Investment Process
Updated: Sep 20
Last week, I was asked an excellent question by a new prospect: “What would you describe as the number one reason for your very impressive investment performance, particularly during the last few difficult months?” I had to think about that for only short moment. Clearly, the number one success factor, in my view, is not intuition, talent or even luck. It is the adherence to a clearly defined and continuously improved investment process – a methodology that gets rid of the “noise and emotion”. Managing assets successfully, whether you do it privately or professionally, requires discipline, investment rules and principles to make the investment decision-making systematic, logical and transparent. Solid investment management is not merely about picking the right investments.
The purpose of investment rules and principles is to avoid investment decisions being dependent on the mood of the investment manager and the latest media hype. Shooting from the hip will only work for short periods of time. It is not a sustainable approach that I would recommend.
The basic structure of our investment process
Clearly, investing cannot be done with a rigid methodology alone; it does also require a fair amount of experience, instinct and talent. However, by having a clearly defined investment process, our clients’ portfolios are managed in a structured, consistent and disciplined manner. By continuously improving this investment process, we aim at ultimately producing better risk-adjusted results.
So, what are the primary tools and general processes under which our organization functions in the realm of our investment-related decision-making? How do we select, buy, sell and monitor the investments made on behalf of our clients?
High-level overview of the BFI Investment Process
Source: BFI Infinity Inc., Investment Process Methodology BFI employs an investment process that starts with a top-down approach, which aims at defining the strategic allocation of our client portfolios. This includes the selection and prioritization of asset classes, sectors, geographies and risk management tools. The top-down research and strategic allocation is primarily founded in the fundamental evaluation of relevant global economic and financial market forces and trends.
Our top-down research flows into both our quarterly Strategic Horizon reviews, as well as into our ongoing Tactical Tuning of the strategic allocation in response to trends and relevant financial market events.
Our bottom-up filtering and the selection of investment opportunities is an ongoing process that generally (save tactical adjustments during the quarter) occurs within the parameters (strategic allocation objectives) set by the quarterly Strategic Horizon decisions. This bottom-up work flows primarily into our Investment Strategy implementation. It may also influence our Tactical Tuning.
In that manner, on an ongoing basis, we select and analyze specific investments and securities that suit our overall strategic allocation. We do this by using a variety of tools, such as common financial data systems (e.g. Bloomberg, SIX Financial Information Telekurs) as well as additional technical and quantitative tools (e.g. the Screener).
The ongoing monitoring culminates in Weekly Investment Meetings, where most of our investment decisions are taken, although we may at times, when markets demand it, take and implement investment decisions on the go during the week.
Quarterly Horizon Meetings
The quarterly Horizon Meetings are conducted by our Investment Steering Committee. The input, and therefore the basis for the analysis and conclusions drawn during the meeting, including the strategic allocation defined for the following 12 months, or at least the following quarter, are made based on internal and external research and discussions.
In order to avoid the risk of an internal “echo chamber”, we actively seek the views of third parties and draw on the expertise and research of other investment professionals, research firms and selected analysts (economists, writers, strategic advisors, etc.). These experts may come from a variety of backgrounds and areas of specialization. Depending on the source, we review their literature, hold conference calls and conduct personal meetings in preparation of and as the input to our quarterly Horizon Meetings. The advice coming from outside experts does not dictate decisions but is rather seen as an anchor point and as additional support to the investment research being conducted at BFI Infinity.
The goal of the Horizon Meetings is to review the “Big Picture”, to agree on key drivers and forces for the global economy and financial markets, and to specify strategic asset allocation targets for the medium- to long-term (3 months / 12-24 months). These decisions are then documented as parameters and tentative allocation objectives for the following 3 months, and as input into our investment strategies (model portfolios). Moreover, the results of the Horizon Meetings are used as the basis for the internal and external communication of BFI’s views on the global economy, financial markets and our investment strategies.
The goal of each quarterly Horizon meeting is to have clearly defined and documented decisions regarding our strategic allocation decisions across investment our core investment strategies. All projections are made as medium- and longer-term trend indicators which define the expected trend direction for each point that is being discussed.
Also, as part of these expected trends and based on the overall outlook, we will define investment exposure levels for each asset category (as % of max. exposure allowed). Based on these benchmarks, we can clearly define the asset allocation of each investment strategy that we are offering.
Any updates and changes that are being agreed upon in the Horizon meeting will be communicated to the relevant internal parties and partners, but especially the Portfolio Management Team. The communication of our strategy parameters and the alignment of internal and external communications are highly important to speak as one company and be consistent in our advice. Also, any publication (e.g. our quarterly “InSights”), blog or other statements made directly to clients need to be consistent with our market view.
In addition to the meeting minutes, which are a general summary of the discussions, any decisions and expected trends and market moves are also clearly documented.
Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.
~ Sigmund Freud
Weekly Investment Meetings
Once a week, BFI’s Investment Committee meets for a weekly update on the status of the previous week’s resolutions, performance and markets. Current market events are analyzed, and the model strategies and portfolios are discussed one by one. Thus, the focus is on the ongoing selection, monitoring and adjusting of the individual investments in the standard strategies and model portfolios.
Finally, the Investment Committee reviews special client cases and the implementation of the investment strategies for new or adjusted mandates. Support staff, under the guidance of our CIO and CEO, prepare data and chart summaries/overviews that will act as a guideline for the discussion.
Unless special market conditions demand immediate action and decision-making that differs from the investment decisions taken already in the prior Investment Committee Meeting, investment decisions are taken at this meeting only.
If this sounds boring and unspectacular to you, you got the right picture. Our process is simple, straight-forward, and VERY effective. I invite you to contact us to review the quality of our team’s work first-hand.
What makes our investing approach stand out is not some sexy and marketing-oriented methodology; instead, it is the understanding that financial markets are moved by a complex system of innumerable variables and factors. Thus, the “secret” behind our superior results is not a magic crystal ball, but simply meticulous research, unbiased analysis and a solid process, all supported by our decades-long experience in the field. This is also what enables us to reliably replicate those results, instead of relying on one-off lucky guesses and “gut feelings”.
Making good decisions within the chaos of our world and the rapid evolution of events requires, first and foremost, a calm and level-headed system to work within. From there, you can enjoy the wondrous world of economics, investment, geopolitics and human behavior. And this why I love my job, no matter how boring it might sound to some!