Investor preferences, such as loss aversion, confirmation bias and herd mentality to name three, also have a lot to answer for in creating disequilibrium in markets and lead to poor decision making, Cunliffe says.
“It inevitably means that financial markets seldom discount incoming news flow in the appropriate way. Elsewhere, while investors seek to maximise their utility, they are a heterogeneous bunch and all have different utility functions, again creating opportunities for an active approach to asset allocation and stock section.”
To combat this noise, and to deal with key client concerns over maintaining an income in a world of low-yields and where geopolitics dominate the news agenda, Cunliffe is a strong believer in the power of solid research.
Charles Stanley has a dedicated in-house research team that helps inform decision making on both the asset management side and the private client offering and it is this in-depth research that not only helps avoid making the wrong decision in reaction to a big event, but can help guide how to make the most of unexpected situations.
“Opportunity is also presented by unexpected developments, be they political or be they economic, and that’s what a manager such as us, which has a strong research footprint, can bring to bear,” he adds.
Cunliffe uses this research when discussing strategy at his team meetings every six weeks, forming a top-down view of the prospect of different asset classes before narrowing it down to a sector or company view.
The process “involves a lot of analysing historical performance of assets, historical correlations, understanding what the market implied returns are” before overlaying the cyclical quarter-term house views on each asset class.
“Really what we’re looking to do is start from the top down in terms of a decision tree,” Cunliffe says.
For example, he currently prefers equities over bonds, and from this broad view the investment strategy is whittled down.
“We go down to the investment themes that we like. We quite like US financials, we quite like infrastructure, we have direct equity within our multi-asset portfolios and direct fixed income,” he says.
“We go from the very top. Percolating all the way down to alternatives, property and infrastructure, all the way down to how we express the various equity views, do we go into actively managed collective investments or do we go to passively managed? That’s another key decision we have to take.”
