We believe in investment talent
Access to talented investors is generally through managed funds. The best place to find these talented investors is in boutique funds, seeded with the managers own capital, and investing in their own unique way.
The size of a fund is generally an impediment to performance. There are exceptions but they are few and far between. We look for managers who are prepared to limit their fund size to protect future returns.
Alignment of interest is fundamental - making sure incentives contribute to this alignment is important. We are not opposed to performance fees which encourage a focus on performance rather than a focus on accumulating funds under management. We are prepared to pay higher fees for better risk adjusted returns.
Markets could accurately value assets if all participants were rational and had the same information. History shows us this is not the case, and markets present opportunities for skilful investors.
To materially outperform markets, you must be prepared to underperform for extended periods of time. Most managed funds' portfolios closely follow markets to prevent underperformance - this precludes them from any material outperformance and ensures similar downside risk as the market.
Diversification is not about holding multiple positions but is about holding uncorrelated positions. The challenge is to find reliably uncorrelated investments. During times of market stress correlations between different investments often converge.
Historical correlations can be mis-leading. It is only by understanding the drivers of a manager's returns that you can assess the likely correlation going forward.
Skillful risk control is the mark of the superior investor - Howard Marks