Should an investment philosophy be data-driven?

In today’s high-tech world, saying you’re “data-driven” has become something of a mandatory for businesses and financial managers. But should your investment philosophy be data-driven? We think “What do the data say?” and “What data would I need to confirm an intuition- or experience-derived belief?” are good questions, and ones that should be asked in order for an investment philosophy to remain vital and grounded in reality. But we do not think that an investment philosophy should be driven by data.

To say an investment philosophy must be data-driven asks more of data than it can deliver. Intuition and personal experience are key ingredients in the development of any belief system, and an investment philosophy is no different. Not all convictions about the markets—or good investment decisions—can be backed up with verifiable data. The nature of investing is to act now on the expectation of future events, and investors are rewarded for being correct ahead of the competition. Sometimes the data don’t reveal themselves until the future has become the past.
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Evaluating real-life investment philosophy statements

We propose three criteria for evaluating a manager’s philosophy statement:

  • It should be a statement of belief as opposed to process, objectives, etc.
  • It should avoid logical fallacies, such as non sequiturs and mythology presented as fact.
  • It should provide enough content about the philosophy itself to constitute a starting place for in-depth exploration.

Below, we evaluate three examples of active investment philosophy statements in terms of these criteria. We chose these three out of the many we looked at because they allow us to illustrate all three evaluation criteria. They are actual investment philosophy statements taken from investment managers’ websites. We modified them only to disguise the managers’ identities.
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What are the 3 essential attributes of a good active investment philosophy?

Last week, we talked about the difference between an investment philosophy—a set of beliefs that guides your approach to investment management—and an investment philosophy statement, which is a summary of those beliefs.

But what constitutes a good active investment philosophy? First and foremost, it must address how investment opportunities come about, why some opportunities are more attractive than others, and how you identify and exploit those opportunities before others do. In our view, these are mandatory components of a meaningful active investment philosophy.

In addition, we believe an active management investment philosophy should also embody the following 3 essential attributes:
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What’s the difference between investment philosophy and an investment philosophy statement?

An investment philosophy is an integrated, nuanced, cultivated set of beliefs about how you approach investing. An investment philosophy statement is a summary of those beliefs.

A philosophy statement is like a resume. It highlights major points and provides a few proof statements without going into too much detail. The goal is to trigger a potential reviewer’s interest in you and a desire to learn more. That’s what an investment philosophy statement should do—give someone who is evaluating your investment philosophy a good grasp of your basic beliefs and provide entry points for a more meaningful conversation to develop.

Effective communication often calls for short, punchy statements. Yet many investment philosophies are based on complex ideas and cannot be easily reduced to an elevator pitch without losing content. How can your investment philosophy statement do justice to your underlying philosophy without becoming a full-blown treatise? We propose three criteria for writing a philosophy statement:
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What is not an investment philosophy?

An investment philosophy is about beliefs that drive judgment and decisions; it’s about how you think. But some active managers confuse what they think with what they do and present implementation-oriented statements as their investment philosophy.

Here are some common examples of statements that, while closely related to philosophy, are not an investment philosophy:
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Communicating Error-Free Investment Results

How automation can minimize operational, regulatory and reputational risks in investment management marketing

With input from Richard Kerr of K&L Gates LLP, and Amy Jones, CIPM, of Guardian Performance Solutions LLC


The investment management industry has automated almost every aspect of its operations over the last several decades: portfolio accounting, performance calculation, pre-trade compliance, order management and trading, analytics, CRM and, more recently, portfolio risk modeling.

But when it comes to pulling all this data together to tell a cohesive story to existing and prospective clients, most investment managers are still operating in a 20th century tech environment, relying on a hodgepodge of spreadsheets and manual calculations to create and publish marketing and client reporting materials.

We call this the “last mile” problem, and it’s a big one. In this paper, we take a hard look at the last mile problem: how it manifests itself in most asset management firms; the operational, regulatory and legal, and reputational risks it poses; and how managers can use technology to fully automate their marketing materials and client reports, and generate error-free communication of investment results.


Origins of Last Mile Problems

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Are You Ready to Answer These RFP Questions About the Last-Mile Problem?

We were industry pioneers when we first defined the “Last-mile problem” in 2015—calling out the failure of most asset management firms to fully automate all data entry into client reports and marketing presentations, and the operational and regulatory risks it poses by allowing errors in key data like performance and GIPS information to slip through the cracks into the very material regulators focus on. Our work has been highlighted by organizations like the National Society of Compliance Professionals, the Investment Adviser Association and the CFA Institute.

Operation due diligence staff at asset owners—and their consultants—have been listening, and many are now asking current and prospective asset managers probing questions about how they handle the last mile at their firm.

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What is an Investment Philosophy?

As an active manager, you need more than good performance numbers to convince prospective clients that you can outperform passive options. You need a sound argument that’s based on your core beliefs about how the markets work. We believe that your investment philosophy should be the basis of that argument.

Just what is an investment philosophy, anyway?

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Can you explain why you have a shot at outperforming passive options?

If you are an active investment manager, you ought to be able to explain why you think you have a shot at outperforming passive options. But we know it’s not easy to come up with a credible answer.

Managers who believe they are able to outperform the markets over time can’t just rely on their past performance record to make their case. You have to show how you combine information with experience, insight and intuition to make investment decisions that will add value in the future.

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Rethinking Investment Philosophy – Executive Summary

By John R. Minahan, Ph.D., CFA, and Thusith I. Mahanama, M.S.

Why do you think you have a shot at outperforming a passive alternative? This is the central question every active investment manager must answer.

Answering it requires a set of beliefs—an investment philosophy.

This paper takes a fresh look at the critical role an investment philosophy plays in helping today’s active manager define, execute and communicate the underlying beliefs that drive their approach to outperforming passive options. It describes how investment philosophy can be used for both investing and marketing purposes, provides a working definition of what constitutes an active investment philosophy—including key attributes of a viable investment philosophy—and offers views on how a well-articulated investment philosophy can enrich the investment process and facilitate external communication.

Key topics discussed

1. What is an investment philosophy?
We define an investment philosophy as a set of beliefs that guides an investor’s approach to investment management. With respect to active management, we believe a meaningful investment philosophy must, at a minimum, address the manager’s beliefs about: a) How the security pricing mechanism works and why it is that some securities are priced more attractively than others; and b) The skill sets necessary to identify and exploit attractive opportunities before prices move to eliminate the attractiveness of the opportunity.

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