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ALDERMEREInvestment Management

Investment approach

Discipline is a sequence, not a sentiment.

Our approach is defined by what has to happen before capital is committed, and by what has to be documented once it is. The philosophy below constrains the process; the process constrains the portfolio.

Philosophy

What we believe, stated as limits rather than claims.

A philosophy is only useful if it rules something out. Each principle below describes a constraint we accept, and each has a cost: opportunities we decline, activity we forgo, and periods in which the approach will look unremarkable.

  1. I

    Horizon before opinion

    The length of time capital can remain invested constrains every other decision. It is established first and revisited rarely.

  2. II

    Risk is chosen, not accepted

    A portfolio should take the risks it intends to take, in sizes that were decided in advance and can be explained afterwards.

  3. III

    Valuation is a discipline

    The price paid is one of the few variables an investor controls. It is treated as part of the decision, not a detail of execution.

  4. IV

    Diversification with intent

    Holdings are combined for what they contribute to the whole. Breadth without purpose is not diversification.

  5. V

    Liquidity is planned

    The ability to meet obligations without forced selling is sized before allocations are made, not after.

  6. VI

    Written reasoning

    Decisions are recorded with their rationale, so that later reviews test the original logic rather than reconstruct it.

Investment process

Ten steps, in order, every time.

The order matters more than any individual step. Most portfolio problems originate in steps one to three being rushed, and are only visible several years later.

The ten stages of the investment process, from understanding objectives through to adjustment.
  1. 01

    Understand objectives

    Establish what the capital is for, who it serves, and over what horizon. Nothing is proposed before this is clear.

  2. 02

    Establish parameters

    Document liquidity requirements, constraints, permitted exposures and the governance that will apply.

  3. 03

    Define risk tolerance

    Express tolerance for decline as a considered magnitude, tested against the obligations the portfolio must meet.

  4. 04

    Develop allocation

    Set strategic weights with ranges, and record the reasoning and the conditions for moving within them.

  5. 05

    Conduct research

    Examine exposures on fundamentals, structure, cost and liquidity, and on what they contribute to the whole.

  6. 06

    Construct the portfolio

    Assemble exposures with attention to correlation, concentration and behaviour under stress.

  7. 07

    Implement

    Execute with regard to cost, timing, tax position where relevant, and the practical liquidity of each holding.

  8. 08

    Monitor exposures

    Track exposures against agreed tolerances, looking through funds and vehicles to underlying risk.

  9. 09

    Review

    Report against the mandate on a scheduled cadence, with the original reasoning available for examination.

  10. 10

    Adjust when warranted

    Act when the mandate, the circumstances or the original reasoning has changed, not when sentiment has.

Portfolio structure

A portfolio is described by roles, not by product names.

Before any holding is selected, each part of the portfolio is assigned a purpose. If a proposed exposure does not fill a role, it does not enter the portfolio, however attractive it appears in isolation.

Portfolio construction
An illustration of how a portfolio is described by the role each part plays. The proportions shown are schematic: they represent structure, not a recommended allocation, and no portfolio is built from a diagram.

  • Growth

    Schematic

    Ownership of businesses and long-duration return sources

  • Defensive

    Schematic

    Duration, credit quality and volatility moderation

  • Diversifying

    Schematic

    Return sources with different drivers to listed equity

  • Real assets

    Schematic

    Contracted income and inflation-sensitive exposure

  • Liquidity

    Schematic

    Reserve sized to obligations, not to what remains

Reading room with a long oak table, brass lamps and bound reference volumes

Risk

We define risk as the investor experiences it.

Statistical dispersion is easy to measure and describes little of what concerns an investor. We report against four lenses instead, because each has a different remedy.

Permanent impairment
Capital that does not recover, as distinct from capital that declines and later recovers.
Shortfall
The portfolio fails to fund the obligation it exists to meet, at the time it is required.
Forced action
Circumstances require a sale at a moment and a price the investor would not have chosen.
Unintended exposure
Risk accumulated through drift or through look-through positions nobody decided to take.

No risk framework removes the possibility of loss. Risk measurement relies on assumptions and historical relationships that may not hold in future conditions.

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Discuss how this would apply

Mandates begin with a discussion of objectives, horizon and constraints, before any portfolio is proposed.

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