In the following analysis, Chris Miles, Head of UK & Ireland Client Group at Capital Group, tells us why he believes that investors must focus on risk, sizing, and macro inputs while staying disciplined.
Play shots in your scoring zone
In cricket, a batsman has a natural ‘scoring zone’ – the areas where they are most comfortable playing shots. This zone varies for each player based on technique, footwork and preferred style. Some excel at driving through the covers, while others prefer pulling short balls to the boundary.
A key principle of portfolio construction is to focus on opportunities that fall within a well-defined scoring zone. When investing, this means prioritising companies with strong moats, dominant or growing market positions, robust balance sheets and effective management teams.
Conversely, companies with high leverage, cyclical businesses and unclear valuation methods often fall outside a well-defined scoring zone. Investments that lack these fundamental strengths can introduce additional risks and uncertainties, making them less suitable for a disciplined portfolio approach.
Do not be index naïve
Bottom-up investors often say they focus on individual companies and do not follow a benchmark when discussing their portfolio’s performance. While it is true that bottom-up investors are not beholden to an index, I believe neither should they be “index naïve”.
A lack of focus on the reference index can sometimes lead industry peers to hold underweight positions in high-conviction companies. This can devalue their hard work because, even if the investment thesis plays out, such holdings would end up becoming relative detractors.
To avoid falling into the same pitfalls, it is important to track the largest overweights and underweights, providing a detailed rationale for their sizes. Regularly revisiting these decisions ensures that the positions remain in an optimal size. The key is to be intentional with every decision made.
Be bold, not reckless
One of the key things to note is differentiating boldness from recklessness. Boldness involves forming convictions, recognizing opportunities that others may overlook, seizing them, and committing significantly. Recklessness, on the other hand, involves:
· Position sizing that leads to holes below the waterline
· Thinking you’ve outsmarted the market
· Investing in a way that puts a fund at risk
· Going off track and for example overloading small-cap investments in a large-cap funds; maxing out non-US investments in a US fund; maintaining large cash holdings perpetually
Know the macro view your portfolio is representing
Have you ever heard a bottom-up investor say, “I do not invest based on macroeconomic factors; I simply select stocks”? While this may hold true on an individual stock level, the variety of companies within an investment portfolio can indeed reflect specific macroeconomic views.
If a portfolio mostly includes high-growth companies with high valuations, the macro view would expect long-term interest rates to decline and inflation to be stable. The 2022 shift from growth to value stocks highlighted a key lesson: many investors neglected the macro view their portfolios indirectly represented and when conditions changed abruptly, they found their investments lacking diversity and ended up behaving similarly. Correlations change and can even reach 1.0 (positive correlation) in stressed environments, it is always important to think about possible events that could test the implicit macro views in your portfolios.
The monetary value of time
There is an opportunity cost associated with positions that are not performing well, and the longer they do not work out, the more they need to increase in value to justify retaining them.
If a stock fell by 80% and you are waiting for a 20% recovery before selling, it may be simply better to move on an investment like that is only worth waiting for if you are convinced the stock could significantly increase in value but remember to have a clear timeline and strategy while doing so. Being long-term investors does not mean avoiding cutting losses when the original investment thesis no longer holds true.
