Investment strategist Thomas Wille talks about the alignment of interests, investment principles and why it can sometimes make sense to deviate from them.
Thomas Wille, what exactly is your role in defining LGT’s investment strategy?
As Head Research & Strategy, my job is to define the investment strategy, or “house view”, for the LGT private banks in Europe. House view means: which asset classes – cash, bonds, equities or alternative investments – do we favor, and which countries, sectors and currencies do we think are attractive? Where do we see opportunities and where are the risks? Which segments, for example US corporate bonds or German equities, do we consider particularly attractive or unattractive?
How important is the investment strategy?
Numerous studies show that around 80 percent of a portfolio’s returns are attributable to asset allocation. A second important task of mine is therefore to communicate the investment strategy – to our relationship managers, our portfolio managers and advisors, but also to our clients. It is very important that these individuals are continuously informed about our market view or our house view, because the strategy is adjusted on an ongoing basis to reflect new market developments.
Clients can invest in the same strategy as the Princely Family
You have worked for a number of different banks during your career, including as a fund manager and investment strategist. How is LGT different in terms of its fundamental convictions when it comes to investing?
LGT stands out because it does what it says it will do – and not just with its clients’ money, but also with its own. Among other things, this also means that clients can invest in the same strategy as the Princely Family. Everyone is therefore ultimately sitting in the same boat, both when markets rise and when they fall. The alignment of interests that results directly from this is not something you come across often in private banking.
One of the most frequently cited investment principles is probably that you should diversify your assets broadly across different investments. But if you are convinced that a certain stock, for example, will rise sharply, shouldn't you concentrate your assets on that stock instead?
If you’re certain that you can accurately predict a stock’s future price development – not only the direction, but also the timing – then perhaps you should do so. Experience shows, however, that very few investors, if any, succeed in this. Anyone who does this kind of analysis knows that although the analysis may be right, you can never be sure to which degree the results thereof have already been priced in or how long it will take for an accurate perception to become established in the market. And if too much time passes, new developments could unfold that you weren’t able to take into account in your analysis. Anyone who nevertheless decides to take such a concentrated risk should be aware that its potential return is offset by a large risk of loss if the share price performs contrary to expectations.
And what advantages does diversification offer?
Diversification is based on the principle that different securities perform differently and that losses on one security are offset by gains on other securities. If you systematically exploit this effect, you achieve a better risk-return ratio in your portfolio. But this doesn’t mean that you no longer have certain areas of focus. You can also do too much of a good thing in terms of diversification.
In your view, why does it make sense to focus on certain areas?
Our fundamental conviction is that financial markets are not always efficient because investors often don’t act rationally. Behavioral economics and behavioral finance have demonstrated this on many occasions. Irrational investor behavior leads to inefficiencies, such as exaggerated swings, both upwards and downwards. Our aim is to identify such inefficiencies and to profit from them. But to be successful with such an approach, you need more than just above-average analytical skills. You also have to be very disciplined. You have to set clear price targets and loss limits for every investment you decide to make and adhere to these consistently. And psychologically, that is probably one of the most difficult things to do when investing. Last but not least, you should not be stubborn, even if you’re convinced of the benefits of active investment management. The large and very liquid equity markets in particular are closely monitored around the clock by hundreds of analysts. It is very difficult to achieve excess returns here through active management. If it is in the interest of our clients, we also use cost-effective passive instruments for these investment segments.
Thomas Wille received a master’s degree in finance from the University of St. Gallen. He has over 20 years of experience as a fund manager and investment strategist. As Head Research & Strategy, he has been Chairman of the Investment Committee for the LGT private banks in Europe since 2016.
Pictures: Nadia Schärli
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