Manpreet Gill is the chief investment officer, Africa/Middle East/Europe (AMEE) at Standard Chartered Wealth Management, based in Dubai. The bank’s evolving investment model promotes diversity of thought, takes on opposing views and encourages debate at the investment committee level. In this interview, Manpreet details the effect that investment diversity has on performance and return.
Iain Bell: Could you introduce Standard Chartered’s adaptive investment process?
Manpreet Gill: At Standard Chartered
Wealth Management, we are subscribers of Andrew Lo’s view that markets are
‘adaptive’. This approach argues that, rather than being perfectly efficient
all the time:
(i) Risk and reward relationships are not stable
(ii) Arbitrage opportunities arise from time to time
(iii) Cause and effect thinking can be misleading
(iv) Various investment strategies will wax and wane as the environment changes
(v) Investors have to adapt to these changing market conditions to achieve investment returns.
This backdrop argues that it is indeed possible to outperform market benchmarks. However, in order to achieve this, investors will need to adopt an investment process that mitigates human biases, since the inefficiencies described by an adaptive markets view themselves arise from behavioral biases.
IB: How would you determine the importance of diversity in the investment-making decision process?
MG: Harnessing diversity is one of the key principles via which we believe it is possible to generate outperformance. However, when we refer to Diversity, we’re really referring to raising cognitive diversity of our investment decision makers. We do this in three ways.
The first is to make use of what we call the ‘Outside view’. This is a process by which we consider a problem in the context of a larger reference group. For example, this could be looking at historical data, doing a quantitative analysis or looking to academic studies.
The second is to make use of what we call the ‘Inside view’. This is the process by which we consider the specifics of the situation at hand. For example, this would include examining independent or central bank research to create a scenario for the future.
Harnessing diversity through these two steps, of course, is not sufficient to mitigate human biases. We combine it with De-biasing and Decision-making (the remaining ‘D’s of our 3D investment process) in order to help mitigate human biases. De-biasing is the process by which we aim to mitigate individual investment committee member biases by curating questions, insights and analysis through a fairly rigorous process. For Decision-making, we rely on (i) giving investment committee members time to reflect on information shared before expressing views anonymously and (ii) relying on an investment committee that comprises diverse, well-training and well-informed individuals given research which shows such a group’s views lead to better investment decisions over time than a single asset class ‘expert’.
IB: What implications has this way of thinking had on your specific asset allocation strategies?
MG: We have seen our approach lead to a number of tangible changes in our investment decisions. For example, we can see there is usually a reasonably high diversity of views across the investment committee and we rarely see one view being a dominant one. We’ve also seen greater awareness of whether a specific view or scenario has become very 1-sided/consensus or not based on our inside and outside views, and we’ve witnessed a much more active incorporation of new information as updated data becomes available.
IB: To what degree does contrarianism play its part in your investment decision making and could you cite any examples of this?
We don’t seek to be contrarian for the sake of it – the goal is to make the best decision for performance based on a mitigation of our biases – but instead seek to meet our performance goals. Sometimes this leads to us to take views not dis-similar to the majority of the market (being overweight equities through several years of the prior cycle was a good example of this, a view that added to outperformance). At other times, it can lead us to take a more contrarian view (our bullish turn on an Asian currency following a period of weakness was an example of this working out successfully, even if it felt decidedly contrarian at the time).
IB: Could you go into more detail into how you incorporate the informational alpha, analytical alpha and behavioural alpha?
MG: We see these three as the main sources of alpha in our investment process. Informational alpha is something we incorporate every day, through our reading, and our conversations with experts across different asset classes and academic/industry specialists. However, we recognize information continues to be made more and more easily available, and hence may not always be the easiest way to deliver alpha.
We do spend a lot of time on analytical alpha. Some of this can be via our own quantitative models or one-off analysis, but we often actively seek out a range of different approaches spanning both inside and outside views. Going back to our investment philosophy, our goal is to seek out a range of analytical perspectives rather than creating a more limited universe on our own, so we use our network as much as possible to that effect.
Finally, we incorporate behavioural alpha through our investment process. This goes back to the 3D investment process we described earlier where we seek to incorporate the analysis and information but review it to ensure we take advantage of Diversity, De-bias investment committee members as much as possible and follow a group-based Decision-making process.
IB: How do you think bias effects traditional ways of investing?
MG: There are many ways in which human bias can impact investing. Four examples where this has a significant impact can help illustrate.
The first is perceptual bias. We tend to perceive what we expect, and hence it can take time to recognize unexpected situations. A second example is biases in evaluating evidence. We tend to gain confidence from a small body of consistent data than a larger body of less consistent data, even if we know the latter is more representative of reality. Third is biases in estimating probabilities. Experts can be overconfident or anchored around a specific level. Fourth is biases in perceiving causality. We often view events as part of a rational, causal pattern and tend to reject randomness. All of these biases can feed into investment decisions unless one takes active steps to mitigate them.
IB: How has this new approach to investing performed?
MG: We have run our Asia tactical asset allocation for almost 10 years and our global tactical asset allocation for almost 5 and so far results have been encouraging. Both allocations continue to deliver positive alpha over the full period, even after incorporating what was a very difficult 2022. Alpha has also been positive in the vast majority of calendar years.