Manpreet Gill is the chief investment officer, Africa/Middle
East/Europe (AMEE) at Standard Chartered Wealth Management, based in Dubai. The
bank’s evolving investment model promotes diversity of thought, takes on
opposing views and encourages debate at the investment committee level. In this
interview, Manpreet details the effect that investment diversity has on performance
and return.
Iain Bell: Could you introduce Standard Chartered’s adaptive
investment process?
Manpreet Gill: At Standard Chartered
Wealth Management, we are subscribers of Andrew Lo’s view that markets are
‘adaptive’. This approach argues that, rather than being perfectly efficient
all the time:
(i) Risk and reward relationships are not stable
(ii) Arbitrage
opportunities arise from time to time
(iii) Cause and
effect thinking can be misleading
(iv) Various
investment strategies will wax and wane as the environment changes
(v) Investors have to
adapt to these changing market conditions to achieve investment returns.
This backdrop argues
that it is indeed possible to outperform market benchmarks. However, in order
to achieve this, investors will need to adopt an investment process that
mitigates human biases, since the inefficiencies described by an adaptive
markets view themselves arise from behavioral biases.
IB: How would you determine the importance of diversity in
the investment-making decision process?
MG: Harnessing diversity
is one of the key principles via which we believe it is possible to generate
outperformance. However, when we refer to Diversity, we’re really referring to
raising cognitive diversity of our investment decision makers. We do this in
three ways.
The first is to make
use of what we call the ‘Outside view’. This is a process by which we consider
a problem in the context of a larger reference group. For example, this could
be looking at historical data, doing a quantitative analysis or looking to
academic studies.
The second is to make
use of what we call the ‘Inside view’. This is the process by which we consider
the specifics of the situation at hand. For example, this would include
examining independent or central bank research to create a scenario for the
future.
Harnessing diversity
through these two steps, of course, is not sufficient to mitigate human biases.
We combine it with De-biasing and Decision-making (the remaining ‘D’s of our 3D
investment process) in order to help mitigate human biases. De-biasing is the
process by which we aim to mitigate individual investment committee member
biases by curating questions, insights and analysis through a fairly rigorous
process. For Decision-making, we rely on (i) giving investment committee
members time to reflect on information shared before expressing views
anonymously and (ii) relying on an investment committee that comprises diverse,
well-training and well-informed individuals given research which shows such a
group’s views lead to better investment decisions over time than a single asset
class ‘expert’.
IB: What implications has this way of thinking had on your
specific asset allocation strategies?
MG: We have seen our
approach lead to a number of tangible changes in our investment decisions. For
example, we can see there is usually a reasonably high diversity of views
across the investment committee and we rarely see one view being a dominant
one. We’ve also seen greater awareness of whether a specific view or scenario
has become very 1-sided/consensus or not based on our inside and outside views,
and we’ve witnessed a much more active incorporation of new information as
updated data becomes available.
IB: To what degree does contrarianism play its part in
your investment decision making and could you cite any examples of this?
We don’t seek to be
contrarian for the sake of it – the goal is to make the best decision for
performance based on a mitigation of our biases – but instead seek to meet our
performance goals. Sometimes this leads to us to take views not dis-similar to
the majority of the market (being overweight equities through several years of
the prior cycle was a good example of this, a view that added to
outperformance). At other times, it can lead us to take a more contrarian view
(our bullish turn on an Asian currency following a period of weakness was an
example of this working out successfully, even if it felt decidedly contrarian
at the time).
IB: Could you go into more detail into how you incorporate
the informational alpha, analytical alpha and behavioural alpha?
MG: We see these three as
the main sources of alpha in our investment process. Informational alpha is
something we incorporate every day, through our reading, and our conversations
with experts across different asset classes and academic/industry specialists.
However, we recognize information continues to be made more and more easily
available, and hence may not always be the easiest way to deliver alpha.
We do spend a lot of
time on analytical alpha. Some of this can be via our own quantitative models
or one-off analysis, but we often actively seek out a range of different
approaches spanning both inside and outside views. Going back to our investment
philosophy, our goal is to seek out a range of analytical perspectives rather
than creating a more limited universe on our own, so we use our network as much
as possible to that effect.
Finally, we
incorporate behavioural alpha through our investment process. This goes back to
the 3D investment process we described earlier where we seek to incorporate the
analysis and information but review it to ensure we take advantage of
Diversity, De-bias investment committee members as much as possible and follow
a group-based Decision-making process.
IB: How do you think bias effects traditional ways of
investing?
MG: There are many ways
in which human bias can impact investing. Four examples where this has a
significant impact can help illustrate.
The first is
perceptual bias. We tend to perceive what we expect, and hence it can take time to
recognize unexpected situations. A second example is biases in evaluating
evidence. We tend to gain confidence from a small body of consistent data
than a larger body of less consistent data, even if we know the latter is more
representative of reality. Third is biases in estimating probabilities. Experts
can be overconfident or anchored around a specific level. Fourth is biases in
perceiving causality. We often view events as part of a rational, causal
pattern and tend to reject randomness. All of these biases can feed into
investment decisions unless one takes active steps to mitigate them.
IB: How has this new approach to investing performed?
MG: We have run our Asia
tactical asset allocation for almost 10 years and our global tactical asset
allocation for almost 5 and so far results have been encouraging. Both
allocations continue to deliver positive alpha over the full period, even after
incorporating what was a very difficult 2022. Alpha has also been positive in
the vast majority of calendar years.