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:
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?
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.
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.