“Humility is attentive patience”

Simone Weil, French philosopher & political activist.

Many of us who have had the privilege to work in financial markets for some years would have been taught the lesson of humility relatively early on in our careers. The trade-idea that didn’t work as planned, the alpha signal that despite weeks of research, fell flat once traded, or the portfolio hedge that did anything but. I know I can think of a few examples in the past few years alone where I have been taught the 'humility lesson' and its powerful alarm is something to which I will always pay attention. 

The lesson on patience, however, is much more difficult to incorporate. Our lives are now filled with instant gratification, from same-day Amazon delivery, instant messaging apps on our phones, social media & food delivered to our door in less than an hour. Instant gratification has proven to be a very useful & some would argue, vital evolutionary advantage, ensuring the survival of our species.

We are pre-disposed to this phenomenon, as we lean towards immediate relief or reward, but this comes at the expense of delayed, and sometime potentially greater, long-term benefits. The deleterious effects of short termism or instant gratification are well understood, coupled with the downstream issues it’s causes. When it comes to exercising ‘active’ patience as it relates to financial markets, this is one of the simplest strategies to follow, yet the hardest to adopt.

Along the investing journey, be it with an investment time horizon of 30 years (a retiree) or multi-generation (a family office), how does one measure investment success? Whilst the objective will differ from one investor to another (return, risk, liquidity, transparency, ESG), the way in which it is achieved from an investment perspective certainly does have some similarities.

From the Briefcase perspective, we offer our clients two distinct investment approaches to support investors achieve their unique objectives:

1.        Multi-asset model portfolios

a.         These diversified portfolios are a seamless way in which investors can implement an 'off the shelf' model portfolio that is pre-packaged, low cost & daily liquid.

b.        The objective function of these diversified portfolios is the maximisation of return per unit of risk.

c.         These portfolios utilize only ASX-listed Exchange Traded funds across equities, fixed income, credit, commodities & AUD Cash, utilizing only best in breed exposures from highly reputable ETF issuers.

2.        Index replication (‘Direct Indexing')

a.         These portfolios are designed for those investors & their advisors who are seeking a customizable, 'one size fits one' portfolio that seeks to meet the unique & specific needs of the investor.

b.        The objective function of the investment process behind these 'one size fits one' portfolio is to reproduce the same pattern of returns as a target portfolio: aka ‘index replication’. 

c.         This proprietary & highly quantitative process is designed to reproduce the returns of a given benchmark, e.g., a broad-based Australian equity benchmark, with any number of constraints as defined by the investor. These may include:

• Removing securities based on unique ESG considerations (e.g. tobacco, adult entertainment, or alcohol).

• Specific industry or sector eliminations (e.g. listed real estate, financials).

• Single share prohibitions (e.g. religious organisations, charitable foundations).

 d.        Most importantly, our index replication algorithms are not designed to outperform a given benchmark in either absolute or risk adjusted terms. Within this context, ‘outperforming’ the given benchmark is as undesirable as ‘underperforming’ it.

In direct indexing, what does 'a job well done' look like?

With the investment objective being to replicate the pattern of the returns of the target benchmark, what does ‘perfect index replication’ look like? From our perspective, perfect index replication is where the direct index portfolio delivers the same return (positive or negative) as the underlying benchmark at the same time. 

What does this have to do with “attentive patience”?

Let’s break this down into its component parts:

1.        Patience

Most investors’ time-horizons are long. Be that planning for retirement, saving for a house deposit, or maintaining / growing multi-generational wealth, investors are looking to extend wealth for many years (and even decades) into the future.

As such, Briefcase Direct Index Portfolios are designed to replicate for periods of one year or more.  Even if portfolio returns perfectly replicate an index return over periods less than one year, this is not by design. Index replication can only be relied upon when the date range is greater than one year.  A longer track record (aka greater patience!) implies a more robust expectation of index replication. As such, rolling one-year returns (or preferably, excess returns) of the direct index portfolio (relative to its parent benchmark) is a far more reliable way to understand performance, as opposed to a standard ‘growth of $100’ chart. This very much lines up with how investors think about investment time horizons.

2.        Being attentive

The Briefcase process is by design highly scalable (many thousands of individually customised portfolios with different constraints & different benchmarks), where daily portfolio monitoring is front & centre.  This is achieved by seamlessly integrating our portfolio monitoring algorithms directly with the executing broker or investment platform, allowing the Briefcase investment team the ability to maintain a firm ‘hand on the steering wheel’ of every client portfolio, ensuring it has the highest probability of achieving the desired investment objective. 

In summary, Briefcase believes that investment portfolios are not dissimilar to a bar of soap: the more you touch it, the less there is. This doesn’t mean that showers become less relevant or frequent, but attentive patience in the portfolio context means we pay close attention every day, making sure portfolios have the greatest probability of achieving the desired outcome. Couple this with the appropriate investment time horizon (i.e. patience), it’s no surprise that Direct Indexing has become one of the most popular strategies and will continue to be adopted both locally & abroad.

Like to know more? Email enquiries@briefcase.au for further information.