Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Lander puts the case for more focus on active management
(Pictured: Jerome Lander)
Jerome Lander, founder of the new research business, ProCapital, and former CIO of the $12 billion NSW Workcover insurance fund, knows the stakes are high for the future of investment portfolios in Australia. He also knows that most investment portfolios lack sufficient exposure to good active management to deal with the challenges that lie ahead.
“Being very active and very selective is crucial right now and for the foreseeable future. Being active means ensuring that returns are not dominated by market returns alone, but instead are heavily influenced by skill,” he says.
“The medium-to-long-term prospective return for all asset classes is currently low. The risk is high. Most investors are likely to again achieve only around 4-6 per cent per annum returns over the next five years while exposing themselves to a significant risk of large losses. A 5 per cent gain with a significant risk of losing 20 per cent in any one year is very poor investing. Their portfolios are generic, low cost and low quality, vulnerable to breaking at a moment’s notice. They have nearly zero ability to benefit from overpriced assets.”
Lander, who left Russell Investments last year after a two-year stint, to form his new business, says: “ProCapital is about connecting those who genuinely want to create wealth for themselves and their clients with those very few and exceptional investment managers.”
Where ProCapital also – selectively, Lander says – represents a fund manager, this is declared to consulting clients and is done only when he has confident that the manager is “exceptional” based on his own research. He says this makes up only a small proportion of his time.
“Today, more than ever, it is essential to be invested with outstanding and fully active investment managers, ” he says. “Indeed, I know it is possible to find investment managers who can achieve 15-20 per cent or more per annum for the next five years. In fact, they are currently doing much better than that. These managers are the rare exception rather than the rule, but if you can find them they should be in your portfolio.”
Lander has spent his career focused on investment strategy and manager selection for the institutional market. He successfully anticipated and profited from the European sovereign debt crisis and has repeatedly managed the best performing multi-manager funds of their kind. He added nearly $1 billion above objectives to Workcover’s coffers while he was CIO.
He says: “There aren’t many credible people out there really trying to find outstanding investment managers to build wealth for their clients. You need significant expertise to do it and to be prepared to work hard. I’d like to think that I’ll be rather popular for helping point my clients in the right direction. My own money is invested alongside our clients so I am totally aligned with client outcomes.”
ProCapital also provides tailored research to institutional investors. This includes research on manager selection, biotech and healthcare stocks, and investment strategy.
Lander says: “There is a great benefit in investigating things which most people aren’t prepared to pay for. It is a shame so few people in our market are prepared to invest in the future and in research and innovation, for the rewards are great to those who do.”
