At the heart of Hyde Park’s investment philosophy is the belief that compounding is the 8th wonder of the world and is the secret to creating wealth over time. In order to compound returns investors need to avoid significant losses, and this principle in turn is at the heart of Warren Buffet’s 2 golden rules of investing:
Rule no. 1: Don’t lose money
Rule no. 2: Don’t forget rule no.1
So how do you give yourself the best chance of avoiding significant losses?
- Diversify your investment portfolio.
- Invest with managers who understand/define the risk of each investment decision they make as the risk of losing money, not the risk of under-performing a benchmark.
So, when Hyde Park is selecting managers to represent they need to fulfill 3 criteria as a minimum:
- Absolute return or benchmark agnostic investment philosophy
- Demonstrate a clear investment edge
- Provide diversification to our investor’s portfolio and risk/return profile
Diversification can be obtained in various ways:
- Asset allocation
- Security selection
- Crisis management
- Cash management
The most important decision for an investor in driving investment returns and capital growth is asset allocation. So, the decision to be in equities rather than bonds or visa-versa is more important than which manager to select within those asset classes. Similarly within equities the decision to invest in developed or emerging markets is more often than not a more important decision than which manager to select within one sector or the other.
Once an investor has taken the decision to invest in an asset class they must then decide which strategy to take, an indexed or active one, in order to obtain the risk premium inherent in the asset class. Hyde Park looks for opportunities where an active approach makes sense, including the following situations:
- There are inefficiencies in the market
- There are inefficiencies within the index itself
- The manager has an identifiable investment edge
Hyde Park works with select equity and bond fund managers in both offshore and UCITS formats.
The experience of market crises, and the financial crisis of 2008 in particular, is that correlations are not stable and converge towards 1, which means therefore that the portfolio diversification one aimed for evaporates at the precise moment when you need it most. It is for this reason that any wealth management strategy which incorporates capital preservation as an objective should have an element of insurance within it. One of the best ways to obtain this is to get exposure to a strategy which is in essence long volatility. The reason for this is that volatility increases during times of crisis.
Since 2005 Hyde Park has worked successfully with the same manager to provide investors with a high level of portfolio insurance.
At extreme periods of political instability there is the risk that a country’s currency depreciates significantly. Whilst this is an infrequent event (Germany in the 1920’s; Asian countries in 1998; Latin American countries at various times, African countries like Zimbabwe in the 2000’s) the result is a dramatic destruction of wealth and therefore a global investor needs to be aware of the risks of such an event.
Accordingly Hyde Park has selected a manager with 50 years of investment experience, running a precious metals UCITS fund mandate.
At Hyde Park we believe that the current investment environment is not normal with quantitative easing spreading from the USA to Japan to Europe and, with it, an increasing risk of currency wars. In such an environment it is important to consider the usefulness, as a hedge, of investing in precious metals, directly or indirectly via an investment manager.
Hyde Park has been selected by a fixed income manager active in the 6th most traded currency in the world representing one of the richest countries in terms of Net Foreign Assets.
In summary Hyde Park views portfolio diversification as crucial to achieving the investor objectives of capital growth and capital preservation. Diversification can be obtained within a portfolio approach to managing money in a variety of ways and in each case Hyde Park seeks to find a manager whose definition of risk is the risk of losing money; in other words money is not managed relative to a benchmark. This view can be taken by a long only as well as long-short manager and should be independent of the investment vehicle the strategy can be managed in.