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Ahead of the marcus evans European Pensions & Investments Summit  2017, 
Peter Andersland discusses how investors should select investment managers

Peter Andersland

Co-Founder

Sector Asset Management

How to Determine the Edge of Active Managers

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  • CIO, Aargauische, Pensionskasse
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Summit Speakers
  • Keith Ambachtsheer, Director, Rotman International Center for Pension Management, University of Toronto & Founder, KPA Advisory Services
  • Ronald van Dijk, Managing Director, Head of Capital Markets, APG Asset Management
  • Jelena Stamenkova van Rumpt, Advisor Responsible Investment, PGGM
  • Janwillem Bouma, Chairman, PensionsEurope
  • Dr Tom Fearnley, Investment Director, Norwegian Ministry of Finance
  • Olivier Rousseau, Executive Director, Fonds de Réserve pour les retraites
  • Hugh Grover, CEO, London LGPS CIV

     and more...

15 - 17 May 2017

Fairmont Le Montreux Palace, Montreux, Switzerland

About Sector Asset Management

Sector Asset Management was established with the purpose of generating investment returns away from the “beaten tracks”. We specialize on high value added, non-mainstream strategies where we have an edge. Such focus could be oriented toward geography, industry, investment process or simply a specific type of risk. More fundamentally, our very business model proves our commitment to Thinking Independently: We select the best investment talent, we allow them to focus exclusively on what they do best –investing and trading, in complete autonomy – yet we keep their risk under control for the safety of our and our clients’ money.

www.sector.no

A deep understanding of the underlying sources of return, what constitutes the edge, and a disciplined process to harvest them are required for successful investing, according to Peter Andersland, Co-Founder, Sector Asset Management. “Return on a portfolio of investments is a function of the percentage of being right versus wrong, as well as of the average profits on winning trades versus the losers. It is the combination of these factors that determines the edge of active managers,” he details.

Sector Asset Management is an asset manager at the marcus evans European Pensions & Investments Summit 2017, taking place in Montreux, Switzerland, 15 – 17 May.

Several commentators talk about the irreversible decline of active management. What’s your view?

In bull markets, when money is flowing into passive vehicles, everything works fine as there is a positive momentum effect in play. The trouble for passive investing arises when money is flowing out. By definition, passive can only sell to active! Active investors calculate intrinsic values and want a discount. Stocks that rallied through a long bull market only because they were an index member end up with a huge gap between price and intrinsic value. They fall hard when the flow turns. This happened in 2000-2002 when the dot coms dragged the entire stock market down. Because passive investing disregards both fundamentals and the price paid, it misallocates capital and this provides the seed for its own destruction. It is fallacy of composition. A fool’s game. As returns slow, passive investors begin to sell, and they can only sell to active. Active is coming back in vogue and investors wonder what they were thinking. Losing the pound to save pennies in fees. So the cycle goes. Active, passive and back again in an everlasting cycle.

If active is coming back in vogue, what is the right way to approach it?

To start with, you must dare to try. Generally I believe an Active Share below 70-80 percent has a hard time covering cost of implementation and should be avoided. Secondly, a deep understanding of the underlying sources of return, what constitutes the edge, as well as a disciplined process to harvest them are all required.

How, then, to choose the “right” active management?

I would start by saying how not to choose active managers. My experience is that most allocators are simply chasing returns. It is the “hot hand” fallacy. The “attraction” of performance numbers is understandable: no qualitative considerations can match the concision and simplicity of a number and, after all, the past is all we know with certainty (or, at least, we believe we know). Problem is, past performance is a terrible predictor of future performance. If anything, past performance has shown to be a good contrarian indicator of future performance.

Looking at past performance is what capital owners should definitely not do. But how about what they should do? What attributes should they look for in order to “right actively” manage their money?

Return on a portfolio of investments is a function of the percentage of being right versus wrong, as well as of the average profits on winning trades versus the losers. It is the combination of these factors that determines the edge of active managers. Whereas they cannot control their winning percentage, or the average profits on their wins, they can control the downside of their losing trades. Thus the first thing we must understand is how they manage when a position turns against them. Next is the winning percentage. It describes the probability of an outcome, and requires many observations before it means anything.

Thus it is helpful if the manager uses a proven selection criterion like, for example, value. Here we have more than 600 months of data on which to calculate the probability. The winning percentage was 55 percent. Average profit on winning months is 2.2 percent and average loss on the misses is 1.9 percent. When evaluating value managers the focus should be on verifying that their skills and process would, at a minimum, capture the “base rate” of the value criterion.

About the European Pensions & Investments Summit 2017

The 17th annual European Pensions & Investments Summit is the ultimate meeting point, bringing elite buyers and sellers together. The Summit offers regional pension investors and international fund managers and consultants an intimate environment for focused discussion of the key new drivers shaping institutional asset allocations. Taking place at the Fairmont Le Montreux Palace, Montreux, Switzerland, 15 - 17 May, the Summit includes presentations on global economic trends, mastering private equity, exploring real estate opportunities and implementing socially responsible policies.

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