Joe Knows: Why Active Managers Should Codify Their Process
Joe Wiggins is the author of 'All Active Managers Should Run Systematic Replicas of Their Portfolios,' and we couldn't agree more. There are three key reasons why such an approach should be valuable to active fund managers: idea generation, noise cancelling, and identifying value-add.
A colleague of mine forwarded an article titled “All Active Managers Should Run Systematic Replicas of Their Portfolios” by Joe Wiggins, who is head of portfolio management at Aberdeen Standard. Well Joe, the folks at Alpha Theory agree. I have highlighted a brief section, but the whole article is worth a read:
In its most basic form, all that is required is a set of portfolio construction rules (number of positions, position sizes, concentration) and criteria about when to buy or sell securities. This can be as simple or complex as is desired, provided it can be managed and maintained by a computer with minimal human involvement.
There are three key reasons why such an approach should be valuable to active fund managers:
Idea Generation: Although not its primary purpose, it can function as a buy and sell idea generation tool that is more sophisticated than a screen or filter. If you continue to hold a stock that the systematic version of our strategy has sold, you should be able to justify why.
Noise Cancelling: The most impactful feature of the approach is the ability to observe investment decisions being made absent much of the noise that influences human judgement. There are a multitude of factors that lead us to make inconsistent and erratic choices. Running a systematic version of a fund removes this issue by focusing solely on the rules prescribed. How much of the potential loss in rigour and detail is compensated for by the removal of noise?
Identifying Value-Add: Active fund managers often struggle to convey what their true value-add or edge is. Too often it is overly generic (‘growth at reasonable price’) or suitably vague (some kind of ‘secret sauce’ or ‘art’). This is a problem. If fund managers are attempting to sell a skill at a high price, it would be helpful to know what it is. Running a systematic version of a fund can be incredibly beneficial in this regard.