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Discipline – How Much Is Too Much?

Peter Fitzgerald, Head of Multi-asset Funds at Aviva Investors, believes that flexible investment processes encouraging creativity and deeper portfolio understanding should prosper over strict adherence to a disciplined approach.

A disciplined investment process is almost always cited as a key reason why a manager has performed well, or is expected to do so.  While this explanation may appeal to many investment consultants and fund analysts, a disciplined process does not necessarily help performance.  Indeed it could actually hinder returns.

Overdoing It

This is more complicated than simply businesses telling prospective clients what they want to hear.  The problem is that many fund management companies believe it themselves.  In their aim to deliver a ‘disciplined’ investment process, fund managers run the risk of creating an overly bureaucratic structure which stifles innovation, creativity and independent thought.

Discipline is important for many areas of fund management, but should it be the central tenet of an entire investment process?  The key to a successful investment process is that it can evolve with market conditions, embraces debate and aids decision making while having clear accountability for actions taken.

Discipline should be more about a manager being clear over the reasons for his action or non-action (which itself is a decision).  Discipline should ensure that a manager has documentary evidence to support his actions, such as an investment diary, to which he subsequently can refer in order to understand why he made/did not make certain investments.  By contrast, the process should not involve an investment committee approving every decision or a rigid meeting schedule outside of which independent thought evaporates.

Creatibity and Innovation

Few managers claim to have a flexible, creative and innovative investment process.  Indeed, it would be refreshing to see such a claim being made in a request-for-proposal response, rather than the usual reason ascribed for outperformance, namely having a disciplined investment process.

Creativity, particularly in a world dominated by restrictive benchmarks, is largely lacking today. We should encourage lateral thinking and embrace the work that managers can do both across and within asset classes. The investment process should facilitate idea generation, investment creativity and a deep understanding of particular asset classes.

There is more to fund management than a disciplined investment process.  

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