Category Archives: Investment thinking

Controlling our Lizard Brain could help us make better decisions

AltMBA2 Lizard

Our brains have developed considerably since early primates diverged from other mammals about 85 million years ago. However, increasingly, behavioural psychology studies are showing us how one part of our grey matter has not changed: our ‘lizard brain’.

The lizard brain, or the limbic system (the thing keeping a lizard’s mind ticking), was used by early humans as a primitive ‘fight or flight’ response. It was also a mechanism for weighing up feeding and procreation options.

Fast forward several million decades, and it has been identified this prehistoric part of our brain is now central to the processing of our memory, decision-making, and emotional reactions. Increasingly behavioural science is examining how controlling your lizard brain can have a profound effect on the way we solve complex problems, from finding a life partner to making better investment decisions.

Quick-fix solutions

The lizard brain enjoys the short-term game. It prefers immediate and quick-fix solutions. It is more fearful of loss than hopeful of gain. This is great for low-value decisions like crossing the road or choosing a hamburger. But engage your lizard brain with anything more complex, and there can be disastrous consequences.

The problem is the framework of the lizard brain emphasizes a narrow spectrum of information; obsessing about previous data while discounting future uncertain indicators. This ancient structure exerts powerful and often unconscious influences on behaviour; and, in the world of investments, it may explain why experienced investors buy at irrationally high prices and sell at irrationally low ones. Lizard brain thinking may also lurk at the bottom of financial catastrophes.

Behavioural psychologists talk about the lizard brain being essentially resistance. It is that little voice in the back of your head, the one telling you something will never work; the one which worries people will laugh at you.  And when under pressure, with the stakes raised and people watching, rather than rationally appraising all the options, the lizard brain instinctively strikes. Behavioural research shows consistently employing an instinctive response in complex, high stake decisions has a negative outcome.

You can read the full article on –

When to fire your fund manager

I spoke about “Knowing when to fire (& when to retain) your fund manager” at Fund Manager Selection 2014 this week.

Here’s a link to the Prezi.

I’d love to hear your thoughts on this.

What are the most important red flags for you? Are there other early warning signals you look for?

Investment actuaries in the future

IMG_0781Tomorrow evening (Thursday 6th June 2013) I have been invited to facilitate a ‘blue sky’ thinking session at Staple Inn with some of the brightest thinkers in the city of London to come up with the subjects and themes that should drive the Finance & Investment research agenda for the Institute and Faculty of Actuaries (IFoA) over the next decade.

Whilst a career as an actuary* was recently ranked as the best job of 2013** I think identifying the right research directions is really important to ensure that the actuarial profession remains relevant, forward looking and at the cutting edge of the finance and investment thinking in the future.

I have 3 questions for you (both actuaries and non-actuaries are welcome to respond):

  1. What is the most important thing people gain from the actuarial qualification?
  2. What are the biggest challenges and opportunities facing actuaries in finance and investment firms?
  3. What do you think should drive the Finance & Investment research agenda for IFoA over the coming decade?

Please reply to this post or email me on [email protected] with your answers, as well as any other ideas or suggestions by 3pm GMT tomorrow (6th June).

Many thanks in advance,



* Actuaries put a financial value on risk – for instance, the chances of a hurricane destroying a beachfront home or the long-term liabilities of a pension.

** The best job of 2013 –, a career website owned by Adicio Inc., recently ranked 200 jobs from best to worst based on five criteria: physical demands, work environment, income, stress, and hiring outlook. Based on these criteria, a career as an Actuary came out on top. You can find the full ranking here

Take a blank sheet of paper to fund management


How would you design a fund management business for the future, if you had a blank sheet of paper today?

I was talking to a leading industry figure yesterday about what was wrong with the fund management industry and why I’d like to redesign it, when he asked me “… so what does your vision for the fund management business of the future look like?”.  With a blank sheet of paper, how would I design a fund management business for the future? This was only the second time anyone had ever asked me a question like this. The first was David Jacob, just before I joined Henderson to help him restructure the fixed income team.

In a sentence if I was building a fund management business today for the future I would  design it around the investment outcomes that clients need. I have never written this down before but after yesterday’s conversation I felt inspired to share my thoughts on the future of fund management and invite other perspectives on it.

Back to the future

When David and I designed and built the fixed income business at Henderson, we focused on getting buy in from our clients and their advisers for our overall vision and our new investment strategy group (that did risk budgeting and asset allocation). Firstly, this better met their needs. Secondly, it meant that once they were comfortable with that they would give us discretion to manage their risk across different underlying asset classes, capabilities and products subject to their risk budget and overall guidelines. Finally, it made it much easier to develop and launch new products that were run out of that team/process.

Today I would start in the same place, but with greater audacity. I have seen too many fund management companies build around asset classes and regional equity silos. This is not in the clients’ best interests and it makes no sense for the future. Clients want outcomes – they want their capital preserved, they want to draw a predictable level of income, they want to beat inflation over the long term, etc. The demand for LDI, hedge funds, absolute return, diversified growth, fiduciary management, global income, inflation protection demonstrates this shift.

Ignore the label

Frankly, clients couldn’t (and shouldn’t) care about asset classes, regions, styles, etc. Asset class labels are not a very helpful way of managing a portfolio; and definitely not a useful way of designing a fund management business.  Yet most are split into independent asset class silos with a clear grading of importance based on the fees they can charge clients. Hedge funds and private equity sit at the top of the pile, followed by property, credit and then government bonds, LDI, solutions, or passive funds at the bottom. “Hedge funds” (“private equity” and “bonds” for that matter) is a deceptive label that can represent a myriad of different capabilities, styles, liquidity and risk profiles.

If what clients want is an outcome or an ultimate goal their starting point should be: where am I today; where do I want to get to and by when; how much risk am I willing to take (what’s return volatility would be uncomfortable and what’s my maximum drawdown); and what cashflow (or liquidity) do I need along the way. This is true for a pension fund, an individual investor, a family office, a sovereign wealth fund, in short, anyone.

An ‘outcomes’ hub

I would build my ideal fund management business around the clients’ needs and therefore around a central risk management, risk budgeting and allocation team. This can’t be a committee of the great and the good, it can’t be just one star manager, and it can’t really be larger than 4-5 people. Each person must bring some distinct perspective and therefore value to the group but clear decision making accountability is critical.

Specialist spokes

Around this hub I would have a series of specialist capabilities (spokes) with 3 critical elements, as follows:

1. I wouldn’t try and be all things to all people. So many fund management businesses have way too many specialist capabilities, many of which consistently deliver pedestrian benchmark performance at best. The key to success in any business is to focus on your areas of differentiation and opportunity. Most CEO’s I’ve met are very proud and want to manufacture everything in house. They wouldn’t dream of investing in a competitors fund even if it’s better. I would not manufacture everything in house. I would outsource any asset that is liquid and commoditized to an external (passive/scale) manager – regional and global large cap equities, government bonds, commodities, etc.

2. I would build my internal capabilities around areas of what I call ‘structural competitive advantage’. When we built our fixed income team, we hired analysts that could straddle high yield and high grade by industry, as well as physical and synthetic credit. Later we merged our developed and emerging market rates teams.  We should have merged our high yield and loans teams. We were looking at building a team/product that invested across property debt and CMBS. In addition, today I would build specialist teams that invest across a company’s capital structure (equity, convertibles, loans, private debt and public debt and derivatives); the same is true for a property and an infrastructure project’s capital structure. I would also have teams that have skills in various less liquid risk premia including commercial real estate debt, infrastructure debt, maybe even corporate lending, social housing, insurance linked securities too.

These are areas of structural competitive advantage because we live in a specialised world where most fund managers and analysts miss the dislocations, mispricing and opportunities that exist along the intersections.  A lot of these fall between the gaps of two adjacent specialists/teams that don’t talk to each other, don’t share insights and use different tools, approaches and buying criteria. More importantly this is not easy changes for most fund management businesses to make as they are structured along these specialist lines with each team having different levels of compensation, each fiercely competitive and each thinking they are better than the other.

3. My specialist teams must offer flexibility rather than holding the business hostage. Too many CEOs become hostage to their specialist teams/stars that have usually grown too large to risk them walking out (client loyalty is with the manager rather than they company). On top of that, once you have invested in a specialist capability, within a broader multi-asset/strategy portfolio, there are lots of barriers to taking your money out (especially if that underlying capability relies on your allocation). If you manufacture specialist teams in house they must have stand alone clients and be credible/saleable on their own too.

However, you don’t have to own/run a capability to be able to use it (given the headaches involved this should be preferable).  I would invest in, take a stake in, have a distribution agreement with and/or build an alliance with a whole host of fledgling, specialist investment boutiques built around exceptional minds with specialist skills, knowledge and insight into a particular market, asset, tool or technique. Many of these are crying out for support, distribution, alliance and capital.

Re-working distribution

This brings me onto distribution. Having a well oiled, connected and regarded distribution capability is fundamental to fund management success. Most fund management groups have separate retail, wholesale, institutional, property, private equity and hedge fund sales and marketing teams that are independent, earn different levels of compensation, have different sales incentives, are very competitive and share nothing. This might have made sense in the past but it absolutely does not make sense for the future. Retail IFAs and platforms are rapidly institutionalising; institutional investors buy retail and hedge fund products; property and private equity investors are buying debt products; and the rapidly growing DC market straddles retail and institutional approaches.

My salespeople would be trusted advisers, more like consultants and problem solvers, than sales people. They would absolutely align themselves with the type of client/investor they are responsible for (so channel specialisation still has some role to play). They must be able to listen and draw out client’s unarticulated needs, they must understand markets and be able to offer advice/assistance to help their clients reach their overall strategic goals.  As part of that they will naturally be able to offer internal outcome-oriented products, specialist underlying capabilities (whether manufactured internally or by a partner, or competitor) and even co-design new products. Either way they client will always see them, will always take their call and will always be willing to meet them because they see them as serving their needs & helping them achieve their goals.

Top 5 outcome-oriented flagship products

My top 5 outcome-oriented flagship products would be: inflation protection, inflation plus/real return, multi asset target return, all weather and global diversified income. These underlying capabilities should be offered in different regions, to different sales channels and at different targets (RPI+2%, Cash +4%, 6% income, etc.).  To really leverage an investment capability (given the bulk of your costs are the fund management manufacturing) I would want to offer the same underlying skills/risk premia into different channels and markets, even packaged into different funds or wrappers. This requires co-ordination amongst sales channels to understand what an investment capability/skill/risk premia can offer their clients, and how it needs to be packaged to meet their needs. From this comes a product development strategy. However, most fund managers don’t do things this way.

Seeding new products

Seeding new product is difficult and they need to be launched and run at critical mass for at least 3-5 years before any sales team would sell it widely. Any new product must be launched with internal seed money, manager/employee co-investment and at least one client seed investor.  Also to launch a new product you should have to shut down an old/out-of-date product at the same time (even if it is profitable). The discipline of this is critical as too many fund managers have too many funds, and can never close them down because they are all marginally profitable. However, they miss the fact that this long tail of capabilities eat up a huge amount of resource, add to operational complexity, distract you endlessly and weigh down a business.


Clearly none of this design and structure matters if you are not able to deliver investment performance consistently, within reasonable risk parameters, to help your clients reach their goals. Having said that, performance itself is not enough to make a successful fund management business. It is critical that clients are educated to measure performance and monitor portfolios over a long enough time horizon.  Delivering relevant, timely and pertinent reporting digitally, in writing, by video and face-to-face with helpful milestones highlighted along the way should make this easier to achieve than ever before. Moreover, this approach might also minimise the reporting burden and short-term measurement impact on the fund manager too.

Which brings us onto the subject of hiring the right people, the best talent and the brightest investment minds to deliver the best investment performance. Do you just throw a lot of money at them? Do you go out of your way to accommodate their individual demands? Now that’s whole different subject for another day.

This is just my gut feel and a bit of ramble.

How would you design your ideal fund management business for the future, with a blank sheet of paper?  I’d love to hear your thoughts on this.

Investing for the next decade

Over the past few months I have been exploring how economies and markets might evolve over the next decade with fund managers, CIOs, consultants and pension funds.  I believe we, and our clients, need to better understand the forces driving current market volatility and to explore possible future market scenarios in order to regain the confidence to invest for the long term again.

The next few years will likely be as volatile as the last few. We are bombarded with numerous charts of asset prices rising one quarter and falling sharply the next. This uncertain and flip-flopping market has taken its toll on our patience, confidence and risk appetite. It is clear that 5 years since the global financial crisis began we continue to face a crisis of confidence.

IMG_0667What we are looking at is just the tip of the iceberg!

Many investors are still waiting for this storm to pass, in hope that the norm they remember from the past will return. Developed market prosperity in the 90s was far from the norm; it was a leverage-induced party, which will take decades to clean up. We need to get used to this environment for the foreseeable future.

At least this is the consensus view amongst economists and strategists. Europe will remain dogged with problems, central banks will continue to print money to stimulate growth and avoid deflation, the ECB will keep doing just enough to support the Euro, the US and the UK might muddle through with low/no growth, volatility will remain high, investor sentiment will stay fragile and that rates will remain low for the next 5-10 years.  If this sounds familiar it’s because this is broadly where we have been for the past 5 years.  This “muddle through” view of the future is what is built into most budgets, plans and business strategy.

How long do you think we will continue to muddle-through for? What asset classes and investment portfolios you think will preserve capital, generate income and real growth in this central scenario?

Economists, strategists and market practitioners draw a number of parallels with Japan. Between 2000 and 2010 Japanese investors dramatically reduced their exposure to domestic bonds from 48% to 16%, in favor of foreign bonds from 4% to 24%.  In trying to explain the present or predict the future, it is very tempting to draw on historical comparisons – 1930s, 1970s, Japan’s lost decade – however many factors today are different from the past.  The future may not follow the consensus view, in fact it rarely does.

In order to explore different futures we need to look beneath the surface of this volatility.


In my experience the key to developing a good forecast of how things might pan out in the future is to understand the unarticulated challenges and frustrations of stakeholders today. We can use this to develop scenarios for the next 5-10 years.

The 5 major forces of change that lie beneath the surface and drive much of the volatility we have observed in markets are as follows:

  1. Debt addiction: It is no secret that we have excessive debt in the financial system, which is manifesting in many ways, including the Eurozone crisis. Despite a lot of talk of austerity, de-leveraging and belt-tightening, most countries have more debt now than they did in 2007. We have transferred the debt built up over decades from banks to governments, who now owe more than they can repay. This situation is not sustainable.
  2. Government & Regulation: Since the financial crisis regulators are becoming more intrusive and aggressive. Regulation is hard to anticipate, but its influence can be significant and can affect a wide range of areas. Governments also have the inherent tension of addressing very serious long-term issues within political cycles that are short term.
  3. Demographics: The developed world has an aging workforce, leading to major changes in the cost of pension and healthcare provision. The growth in size of population also has implications for resources, in particular energy, water and food.  The asset management industry has grown exponentially in a pre-retirement world; we are now moving into a post retirement world that needs income, preservation and solutions.  Asset managers have to adapt or die.
  4. Technology: The current pace of change in physical technology and the impact on society in general and markets in particular has been likened to the Industrial Revolution. Developments have created new industries, new investment opportunities and fresh solutions to existing problems.
  5. Public Trust: The relationships between the public and their government, their media, their banks and their corporates have deteriorated following recent scandals, with deep concerns that institutions are not acting in the public’s best interest.

These are major forces of change on their own, let alone when considered together. We could be entering a period of significant change in world economies, politics and capital markets that could materially affect the decisions facing investors.

Let’s consider some alternative scenarios for the next decade:


There are various future scenarios we could imagine:

Depression – this is the scenario that the bond markets have been pricing in – a deep and protracted trough in economic output, a sharp and prolonged increase in unemployment, fall in consumption, restriction of credit, shrinking output and shrinking investment. We would see significant defaults on corporate bonds, equity markets would fall and bond yields would remain low. We are familiar with this to some extent though we have been teetering on the edge of it. Central banks have thrown the kitchen sink at trying to limit this risk so far.  Assets that one might hold to preserve value in depression include global bonds, cash and put options.

Sovereign default – it is very plausible that a major country will default in the next few years. Sovereign default means a country does not pay its owed interest or return its borrowed principal. The longer economic growth remains low and the longer governments do not reduce their spending or cannot increase taxes, the harder it becomes for them to service their debt and access future capital. This would lead to significant losses on government bonds and all risky assets. Diversifying government bonds might be the main store of value in this environment.

Currency crisis – we are seeing a race to the bottom with developed countries trying to devalue their currencies faster than each other to maintain global competitiveness.  In this scenario we could see significant devaluation of a major currency that becomes self-fulfilling.  The country’s purchasing power and wealth would be diminished leading to a sharp rise in bond yields.

Euro break up – it feels like the risk of this is reduced for now as the ECB has said that it will do whatever it takes to sustain the Euro given the undesired consequences of a Euro break up – defaults on contracts and significant losses.  Being overweight core Europe versus the periphery would be a sensible way to invest for this scenario.

Hyperinflation – we’ve already seen prices rise by around 5%pa over the past 3 years, but hyperinflation is when it rises above 10%pa and gets out of control.  Prices increase rapidly as money loses value, wiping out purchasing power. Investors hoard assets and we could even find people rioting on the streets. Index linked bonds and Gold might prove to be a good store of value in this scenario.

Climate change & resource scarcity – this relates to the growing concern that climate change is for real and our ability to create new renewable energy /resources/ technology is slower than our demand for resources globally.  This is plausible if emerging economies keep growing at the current rate and demanding their share of water, oil and other resources. Governments have to divert capital from productive uses to accelerate the development of new technologies; ultimately this could lead to conflict between nations. Agriculture, soft commodities, environmental technology could be interesting investments for this scenario.

Major War – would lead to destruction of physical and human capital leaving a depleted workforce and dampening economic output and consumption for many years. War is negative for all risky assets, with only Swiss francs or maybe put options preserving capital.

Which of these scenarios worry you the most? Which do you think is most likely? What kind of portfolio with you hold to weather this storm?

We must remember that these risks are inter-related and also none of these scenarios need to play out fully for asset prices to change and start reflecting these fears.


We could summarize these as 2 competing scenarios – inflationary and deflationary:

The Deflationists have been worrying policy makers and driving bond market pricing in recent years. They believe that the world will take years to work out the excess debt cycle we have created in the past 60 years. They are clear that low growth and low inflation combined with systematically high unemployment is here to stay with interest rates staying low for a generation. Government bonds, cash and gold tend to be the best stores of value in this scenario.

The Inflationists are starting to be heard more now. They say Central banks have already made money too easy and that they will continue to print money across the globe. This systematic monetary debasement since the gold standard will ultimately lead to inflation that will tear through investment values.  Cash will lose money in real terms and many investments will not even meet cash. In this kind of scenario index linked bonds, gold, agriculture and real assets might be the best stores of value.

We should also consider a Bullish Scenario. What if market fears are overdone?

Those that found the courage to more bullish in 2012 and coming into 2013 would have performed well.  There are positive developments around the world and maybe these fears are overdone and already priced in.  We would enter a more bullish environment if the Eurozone stabilizes better than markets are pricing in, US recovery continues, China recovers, inflation picks up gradually but central banks in control. We should have some allocation to these bullish scenarios in our portfolios. Some of the following assets maybe more appropriate investments for a bullish economic backdrop – European equities, global growth equities, EM equities, long-short equities, real estate and private equity

Do you think markets are pricing in too much doom and gloom? How likely you think a more bullish scenario is? What assets you would you hold for a more bullish market scenario? How much you think you should allocate to a more bullish scenario?

Synthesis – So what do we do with all this information?

We have considered various forces of change working beneath the surface driving current market volatility.  We have begun to explore various future market scenarios and started to think about the kind of assets that might perform in each of these scenarios. This does not have to be a one off static exercise but can be developed further over the next few quarters/years and can be refined by getting input from various stakeholders including your fund managers.

We could build a broad portfolio of investments across portfolios designed for a muddle through, bullish, inflationary and deflationary scenarios:

  1. Muddle through portfolio including assets like global equity income, global high yield, EM equity/debt, multi asset funds, loans, ABS and real estate.
  2. Inflationary portfolio including assets like index linked bonds, gold, agriculture, real estate and other real assets.
  3. Deflationary portfolio including assets like global bonds, cash and put options
  4. Bullish portfolio including assets like European equities, global growth equities, EM equities, long-short equities, real estate and private equity.


Given market uncertainty, there would be benefits in dynamically changing these allocations between scenarios ourselves or having our fund managers be more dynamic in their allocations for us. This could be a sensible way to allocate medium to longer-term investments.

Most of us take an incremental approach to change, through a series of short annual or quarterly steps. Managing long term money, portfolios or businesses with a series of one year horizons, will not prepare us for shocks and surprises that lie ahead; and will not perform as well as a longer term strategy grounded in proper long term scenario analysis.


Further reading & useful references:

• Morgan Stanley Research Europe: Global Asset Managers – How asset managers grow in a low return world? – 10th November 2011
• HSBC Global Research – Multi Asset: “The 10 key trends changing investment management and how they will affect asset prices” – Garry Evans September 2012
• Goldman Sachs Global Investment Research: US Asset Management at a Crossroads – Introducing five possible pathways to the future 5th October 2012
• Peter Schwartz: Winning in an uncertain future through scenario planning – 27th Feb 2012
• Harvard Business Review: Adaptability The new competitive advantage – July-August 2011
• McKinsey & Co. Financial Services Practice: Growth in a time of Uncertainty – The Asset Management Industry in 2012
• McKinsey & Co. Financial Services Practice: The Mainstreaming of Alternative Investments – Fuelling the Next Wave of Growth in Asset Management
• Towers Watson: We need a bigger boat – sustainability in investment
• Create-Research: Innovation in the age of volatility
• Outsights: 21 drivers for the 21st Century

Important Information

This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. I provide  economic analysis and opinion to stimulate debate and thought. I do not intend to give investment advice and certainly not any specific trade ideas. You alone are responsible for your actions, and whatever you do, you do it at your own risk.  Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.