As reported on CitiWire, we are very excited to announce that Market Thinking and Toscafund have joined together to launch a new, behavioural finance backed, Global Equity Fund, to be called, appropriately enough, the Tosca Market Thinking Fund.
This brings together over 35 years of my investment experience with over 35 months of beta testing and almost 18 months of hard work on the administrative side to launch a UCITS compliant long only fund. This builds on the Model Portfolios that we periodically refer to on the Market Thinking blog, specifically combining the Factor and Thematic Model Portfolios into a single fund.
The four years since I left Axa Investment Managers have, as the title implies gone very fast on the one hand, but very slow on the other (mainly thanks to Covid), but we are now live and moving to the next chapter.
Of course, the title also references Daniel Kahneman's classic 2011 book about human behaviour, which was actually the subject of a very early post on Market Thinking, with, for our purposes, particular focus on the aspects of behaviour that affect financial markets. Comparing cognitive models when decisions are made under conditions of stress and uncertainty with the models based on rational behaviour challenged assumptions about the behaviour of economies and markets. The most obvious behaviours are cognitive biases leading to running losses and cutting winners, or issues like loss aversion, anchoring and the differential weighting of probabilities.
As Daniel Kahneman himself admitted, recognising these behavioural traits doesn’t prevent us from repeating them! We need to build systems that help us overcome them. Designing a process that codifies our slow brain thinking in response to changing circumstances (effectively setting out our considered response to various events in advance ) allows us to adapt to changing markets in a more rational way.
Using systems and structures to reduce unforced errors on the one hand while also using them to identify behaviours in others, places behavioural finance at the heart of our process
Meanwhile, we also need to recognise that other market participants will not be rational is the same way and that being able to recognise things like over-confidence, projection bias, recency bias and others behavioural short cuts should help us understand the needs, motives and incentives for other players in financial markets. For example, asset allocators will often buy something, not because they necessarily like the risk return from an investment perspective, but because they are underweight and it is going up. And obviously vice versa. The point is that often they are not managing the underlying investment risk, they are managing their own business risk.
The important thing here is that we should not then interpret their buying or selling as information to act upon ourselves on the basis that “they know something”. Similarly, a leveraged trader declaring that a currency is going to ‘collapse’, or ‘soar’ will accompany the statement with an exaggerated prediction, only to sell into any subsequent move when a fraction of the forecast has actually been achieved. Here again, buying into that narrative will more likely increase the risk rather than the return of our portfolio.
Our aim is to achieve real returns, participating in the upside, while protecting the downside
Making sense of what is real and what is narrative is the essence of Market Thinking and the new fund aims to distil that into an investable product. A big part of the initiative is thus to take away the structures that force fund managers to minimise the risks that can be measured - benchmark and volatility - while not constraining other risks such as such as leverage and illiquidity, or indeed stock specific risk. We addressed these topics in some detail on other blog posts about actively managed portfolios and the risk return debate. Knowing which risks you are taking - and which you are not - is key to a transparent understanding of the likely risk adjusted return profile. Our model portfolios avoid stock specific risk by using thematic and sector baskets and thus also remove other connected portfolio issues like concentration risk. We take no leverage, nor do we use any derivatives. Clean and simple, the aim is to participate as much as possible in the upside for equities, while being able to step aside in down markets and thus avoid tracking an index downwards.
The Market Thinking blog does not offer financial advice, it is for information and hopefully entertainment purposes only. The fund is only available to professional investors and anyone interested should contact their professional advisor or the team at Toscafund.com