, , , , , , , , , , ,

Peter Elston

Peter Elston, Head of Asia Pacific Strategy and Asset Allocation at Aberdeen Asset Management, was recently interviewed by Channel NewsAsia and featured on their program ‘Money Mind.’ The program gave viewers a glimpse of the asset management industry’s work process and the inner workings and thoughts of a fund manager.

Many retail investors and non-investment professionals often wonder how the professional investors and financial experts manage assets and capital. This interview with Elston offered certain insights at the thought processes of a professional fund manager and as well simple fundamental knowledge into how large institutional portfolios are managed.

Below are major points and takeaways of Money Mind’s interview with Peter Elston:

Quantify the Investment Process:

Like the legendary investor Sir John Templeton, Elston stresses that quantifying the investment process is extremely vital for investment management. Objectifying and quantifying decision parameters and gauges helps the investor to remain calm and disciplined to carry out important decision making. 18th Century philosopher David Hume once famously proclaimed that reason is the slave of human emotion, and modern day neuroscience studies seem to confirm this phenomena. When huge unexpected movements happen in financial markets, emotions tend to get the better of many investors – only the disciplined ones who have quantified their investment parameters will know how to respond and make decisions based on those parameters.

Elston has repeatedly mentioned throughout the interview that its all about “numbers, numbers, numbers” when being asked on how he responds to world events. The idea that he stresses is “to be as rational as possible in all possible circumstances.” This doesn’t necessarily mean that investors should automate and formulate algorithms, but it does mean that investors should have a cool and disciplined system that uses quantitative reasoning in light of irrational markets situations.

Be Sure to Profit from Fear or Greed: 

The shrewd investor must be positioned to profit from bouts of human emotions being manifested in the financial markets. Quantifying the investment process, as mentioned earlier, will help the investor execute this classic golden mantra and be well positioned to profit from fear or greed. Throughout history, humans have been known to overreact, and sometimes panic can manifest into huge amounts of selling pressure in the markets – further depressing asset prices. The intelligent investor will use these emotional floods repeatedly to his advantage.

Stress Test Your Portfolio and Perform Scenario Analysis:

It is extremely important to have an opinion on the overall situation of the portfolio’s position in light of major near future major events. Institutional investors and professional money managers often perform scenario analyses and stress-test their portfolios repeatedly based on those research and analyses. From there, they could come up with hedging strategies or rebalancing adjustments to optimize their portfolios and the positions of their assets.

Basic decision trees and path dependency frameworks can serve as aid tools to many investors. It is near impossible to predict the future, or the direction of interest rates, or the exact value of a currency pair within a certain time frame. However, what is extremely crucial is how one responds and reacts to what is transpiring! As what legendary investor George Soros proclaims: “It doesn’t matter if you don’t know what is going to happen, what is more important is how you respond to it.” Mapping out decision trees and setting down various probable courses of actions from there will give investors some form of idea (as well as the costs and benefits of those actions) into optimally positioning themselves against future events – whether positive or adverse.

If anyone wants to improve his or her investment performance, he or she ought to formalize their investment systems and perhaps adopt a similar framework and practices of the asset management industry as explained and shared above.