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There is no premium for complexity

Thursday, January 12, 2017

Louis Cucciniello, Head of Diversifying Assets

At Pacific Asset Management (PAM), we work hard to look at diversification in different ways. One way the CIO and the portfolio management team looks at diversification is by factor analysis – specifically on what non-directional factors to add to the portfolio which will improve the risk return over the long run. At PAM we strongly believe there is no premium for complexity when it comes to non-directional factor investing.

The advent of quantitative easing has disrupted the normal behaviour of traditional asset classes correlations. To combat the lack of correlation predictability, investors have turned to absolute return/hedge fund strategies that have historically been sold on their non-directional or low correlation benefits. However, many are expensive, opaque and since the onset of quantitative easing, have had disappointing performance. At PAM we believe there is a better way to gain exposure to non-directional strategies – essentially by shunning complexity and high fees.

With the potential of rising rates in the US, and the risks of excessive inflationary pressure caused by a Trump administration, diversifying assets have, perhaps, never been more important. As head of diversifying assets, I work very closely with Will and our portfolio management team to identify and isolate the best opportunities, that over time have good risk reward characteristics and are truly uncorrelated with the rest of the portfolio. I have been creating and executing non-directional factor strategies for over 15 years.

At PAM we manage many of our strategies internally which allows for significant cost savings vs competing non-directional strategies. One reason we can be less expensive, is that our strategies are executed directly in the portfolio, with an emphasis on simplicity and with simplicity comes cost savings.

You may think that the simple strategy would not perform as well as it’s complex counterpart. However simpler strategies perform just as well and sometimes better than their complex counterparts. Simpler strategies have also shown to have more stable risk/return characteristics. So why pay more for something complex when simpler and cheaper will do just as well – if not better.

Multi-asset portfolios combined with non-directional diversifying factor strategies make a powerful combination.

IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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