Sunday, April 27, 2014

The secret to good money management - agility

Athletes are paid for their agility. It is a quality that is not often referred to with money managers, yet it may be one of the key skills necessary for success. In fact, the current environment makes it very costly to be agile. Managers are expected to stay close to their benchmark. They are not allowed to provide style drift. If we are playing a game, the market wants everyone to stick to their position or their zone. There is no premium for those who venture beyond their assigned position.

What does it mean to be a agile money manager and who should be one? Since there is a growing level of specialization with money managers, agility is viewed negatively, yet high returns or risk protection only comes when a manager changes his behavior when the environment changes. Changes to some is called style drift, but the macro investor or the pension endowment manager needs to show agility to do better. "Style" drift as defined as moving between asset classes actually is a good thing for the macro manager.  The drift across asset classes is a key means for value-added. Even if strategic allocations are set, the drift across asset classes may be the only significant means for adding value. 

The skills of the agile manager are twofold, adaptability and and openness to new idea. Change is good. When asked why he so often changed his view, Keynes retorted, "When I face a new set of facts I change, what do you sir?"

If the investment environment changes, a manager has to adapt to the change. If alpha is dynamic, then the manager has to find new sources of alpha and abandon the old strategies. An openness to new ideas means a willingness to think through the new fads that hit since. It does not mean every idea has to be tried. It only means they have to be explored. For example, the current rage is "smart beta". Does this make sense? The jury is still out on smart beta, but there are some clear lessons to be learned such as market capitalization indices have flaws. This is a good take-away regardless of whether you ever buy into a smart beta approach.

Is agility measurable? This is hard to say since the forecasting skill of many managers is so poor. At the very least, the question of agility should be asked and a response should be offered. Whether a manager is agile or not should not be a secret. 

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