December 13, 2015

Lessons from the last 40 years for the next 20

By Alan Brown

Einstein reputedly said: “We should always make things as simple as we can, but no simpler.” Looking back over the last 40 years, it is clear the investment community has repeatedly been guilty of oversimplification to the detriment of investors. The lessons of the past convince me that, going forward, successful asset owners and asset managers will be those that stop making things too simple. They will instead acknowledge that: tail events occur more frequently than a ‘normally’ distributed world implies; volatility serves little purpose as a risk measure; acknowledging behavioural biases is the most important step to overcoming them; and there are risks and opportunities that no backward-looking statistical measure will ever capture, but it would be extremely foolish not to account for those that should be expected.
  1. Expect the unexpected

Unforecastable events happen all the time. As investors, we need to recognise that and remain humble about our ability to predict the future.

This doesn’t just include political or geological events. Disruptive technologies, for example, come out of left-field, surprise us and have a huge impact. The exponential growth in computing power and affordability has had a profound impact on our industry. Not just in terms of the products and capabilities of the companies we invest in, but also on our own technology and understanding.

Gordon E. Moore, founder of Intel, in his 1965 paper, predicted that computing capabilities would double approximately every two years. Known as ‘Moore’s Law’, he was originally referring to the number of transistors on a chip, but today it is interpreted as speeds and memory will double every two years while prices will halve. This has stood the test of time remarkably well.

Before Moore’s Law was written, in 1952 Harry Markowitz first published his Nobel Prize- winning work in modern portfolio theory, Portfolio Selection. He introduced the concept of mean variance efficient portfolios, where risk was defined as the volatility (standard deviation) of returns. An efficient portfolio was one which gave the highest return for a given level of risk. While his theory was elegant, at the time it was impossible to implement as the necessary computing power to handle large scale matrices of returns, volatilities and correlations didn’t exist.

Download the full whitepaper (pdf , 572.22 KB)


February 28, 2018
Long-term investing in public equity markets
In 2015, fifteen Dutch CIOs of asset owners and asset managers wrote an article with the title: ‘Short-term profit or long-term value creation?’ A growing group of pension funds, asset managers, consultants and companies worldwide try to answer this question.
October 26, 2017
Making an impact by defining the right mix of ESG strategies
Whilst supranational institutions and NGOs have for too long been alone on the front lines of the battle against poverty, corruption, and resource depletion, both companies and the finance sector are now fully aware of the role they have to play in the transition to a more sustainable economy. So-called “megatrends” – demographics, globalisation, the environment, societal evolution – act as disruptive forces and offer growth potential for investors. The motivations of asset owners have evolved; they have become more elaborate, more complex and more meaningful, and now include topics that go beyond the unique consideration of achieving financial performance. Even if performance remains the primary objective, investors now want their portfolios to have an impact on both the environment and society, and want to measure the efficiency of this choice.