Risk appetite
“Risk appetite in our lingo is called risk wallet. Exactly how much risk should be taken to generate the targeted return? How do you really define what the risks are and what risks a client should be taking, and what risks they should be avoiding?” he says.
“We link those questions and find an ‘identity’ of an investment team. If a team is collectively very thoughtful and thinks in the long term, and perhaps is collectively a little bit introverted, I would expect them to take longer term risks versus a team who’s more hyper, looking for quick rewards."
“It’s all about an investor’s identity. You need to draw that out within asset classes, and within each individual investment team."
“You need all this to help the investment teams understand how they are going to allocate risk. We try and come up with a numerical value for risk. How much of my risk wallet am I putting into a single security? Are we any good at selecting single securities? Are we any good at timing the market?"
Working with portfolio managers
Rew is clear that there needs to be a delineation between what he does and what portfolio managers do. The portfolio managers work with clients, they think about asset classes and analyse specific securities. They manage the portfolio and are responsible for the risks that they take.
On the other hand Rew is clear on his team’s responsibilities: delivering a cutting edge and aligned data, technology, analytics and visualisation strategy that enhances what the investment teams do.
“For us, the first stage is just measuring what people are doing and finding what they’re good at. From there you start working with the team to refine what they’re doing. We help find somebody’s edge and prove that up and that allows investors to increase risk, and return, over time."
“There is a difference between what people think they’re doing, what they’re actually doing, and what they’re really good at. In some cases there may not be a big void but in other cases it might be. Once you can measure decisions, people move away from guesstimates or feelings and their behaviours can change.”
Rew uses the analogy of going to a gym.
“I decide to go to the gym. I’m trying to get fitter. I think I know what to do to lose weight – what areas to focus on. If I then have a good trainer, everything is measured, I would turn up and be asked what have I done this week? The trainer would look at what I’ve eaten, how I’ve slept, what exercises I’ve done. Then he would reduce what I shouldn’t be doing and increase what I should be doing."
“But it all starts with capturing the data and knowing what you want to achieve. It’s the whole risk wallet piece,” he says.
I was looking for people who think differently. Game designers spend their lives interacting with screens. They have a great linkage of analytics to visualisation. Game designers are engaged with technology, We can learn from that.”
Capturing the right data
“The data bit is incredibly hard. If you have the wrong data and analyse it, I guarantee you will find the right wrong answer,” Rew says.
“You can’t set up the team until you know what questions you want to answer. And once you’ve got the questions and the team, you need to work out how to find the data. And to find this data the first question then becomes, does the available data actually capture and reflect the investment framework, the investment decisions, and the world view of the individual investment teams and managers? Our experience shows that most of the data our strategy and investment teams demand needs to be created by us, as it wasn’t previously available.”
“Tagging” as the name suggests is used on websites to capture data about users and how they interact with content. Similarly, in investment management ‘tagging’ securities is used to define and differentiate between each security they may be invested in. A perennial issue, in both cases, is accurately and appropriately tagging information and data. Rew says part of the problem with tagging is that there is no one way to tag, and the traditional tags, such as sectors, countries, are misleading at best.
“We all tag things based on how we see things. You’re a portfolio manager and you’re looking at a specific security or company. You will see it a certain way, because of your investment style, your investment approach, your risk wallet. You see it differently to how I would see it. So using a one size fits all, standardised tagging approach is just not the way to go. What we have to provide is a platform to see things through the portfolio manager’s lens.”
“And many of the teams tag the same things differently because of their different perspectives. So how do we work with that? How do we pull that into what we do, use those tags, and push back our information, and data and analytics to the portfolio manager in a way that’s useful?”
“The behavioural and analytical challenge we face is that ‘tagging’ has too frequently been used across the industry to simplify the way we describe individual securities, or a total portfolio or investment strategy. But this simplification risks over-simplifying a complex challenge, and focusing investors on the wrong things, especially from a portfolio construction and position sizing perspective, resulting in inferior investment outcomes.”