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Sir John Templeton, the great investor and philanthropist, once said that “the time to reflect on your investing methods is when you are most successful, not when you are making the most mistakes”. This reminds me of the Sigmoid Curve, a mathematical function, commonly applied to business and other activities in life. The curve is used to describe the story of a product’s life cycle, the rise and fall of corporations, and can be extended to personal life, for example describing the course of love and relationships (Charles Handy, 1994).
Source: Seed Investments Research (5 September 2017)
The curve represents time on the horizontal axis and activity on the vertical axis. There is an initial development stage starting slowly, experimenting and faltering before growing until eventually petering out. Charles Handy pointed out that the key to constant growth is through starting a second curve at point A (good times), where there is time, energy and resources to get the new curve through its initial explorations and floundering before the first curve begins to dip downwards. Although this seems obvious, the message coming across at point A is that all is well and therefore why change a winning formula? Experience tells that the real energy for change comes when one is staring disaster in the face, represented by point B on the curve.
The Curve in Investing
The shape of the curve is not new in investments, and is commonly used to illustrate when to buy or sell assets. The investment philosophy at Seed is to take a long term view. Strategy selection within the funds is guided by the structured investment process, including strategic and tactical asset allocation. It is easier to contemplate changes when something is not working rather than when it is.
Furthermore, looking at the Sigmoid Curve, aside from the concept of taking profit, it seems paradoxical to think long term (buy & hold) and change (point A on curve), particularly because at this point, things are going well.
Seed Balanced Fund
Although manager/strategy decisions are made as per our investment process, I carried out an exercise to check at which point on the curve these decisions are made, good or bad times. The chart below illustrates points at which new strategies have been added to the Seed Balanced Fund in relation to the quartile performance of the fund on a rolling 3 year basis. The fund has been in the top or second quartile 92% of the time, outperforming the peer group average across all periods and the CPI + 6% return target, 76% of the time. In general, the additions are predominantly during periods of good performance.
Arrows represent points at which new strategies have been added to the fund (global property, local high yield property, African equity, China equity, local equity, offshore equity and credit)
Source: Seed Research & Morningstar Direct (5 September 2017)
I juxtaposed the same analysis on a shorter-term chart (rolling 1 year) being more volatile and potentially more informative with respect to current experience. The fund outperforms the peer average 71% of the time and the return target 55% of the time. The results are consistent with those above. However, the most recent strategy changes in 2016 only occurred after a period of outperformance (point B) – hopefully, lesson learnt. Fortunately, the upswing came shortly after.
Seed’s decision making continues to follow a structured investment process. To stay ahead, it is important to remain cognisant of the fact that it is just as important to reflect on investments in good times just as it is naturally easy to reflect during tough times.