The key elements of an investment approach are philosophy and process. While a team's investing philosophy should remain stable over time, the process should appropriately evolve. Investors should expect superior investment managers to continually revisit their investment process to determine what, if any, improvements can be made, which is exactly what we do.
The three cornerstones of our philosophy—macro, fundamental, and dynamic risk management—have stood the test of time. But we are constantly re-examining our process.
This continual re-examination does not always lead us to make material changes. Sometimes we verify that we're doing things well, and we continue with the plan, revisiting it again later.
From time to time, however, changes are warranted. That is not to say a change will occur overnight. In fact, any change requires a great deal of thought and due diligence first. Only then will we implement a change.
Revisiting Our Models
To help us evolve our process, we have created frameworks. These frameworks are the analytical tools—the scaffolding, if you will—that govern our process and ensure consistency and repeatability over time.
Then, within those frameworks, we have a number of different inputs—inflation assumptions, growth assumptions, and volatilities and correlations among and between markets and currencies, for example. All of these are forward-looking and are subjectively set by the team.
We revisit these inputs at least annually, but the frameworks themselves are also revisited on a regular basis. They don't change as often as the inputs do, but they do evolve over time.
One way our frameworks have evolved is in the way we think about negotiating power. We've long thought about the role geopolitical forces have in moving prices away from and toward fundamental value. Several years ago, however, we developed a formalized framework to evaluate these influences building on the tenets of game theory.
We have also evolved the game theory framework even more during the past few years, developing a new measure of the power that a country or a leader might have in a game theater—net influence. See the recent example of our Asian Game Theater net influence chart in this post.
We also recently finalized an enhancement to our currency valuation model. Where we used to assess the carry component of a currency over a 20-year window, we will soon begin to use a five-year window because we believe that this medium-term horizon is more consistent with the reversion period of currency prices around fundamental valuation. This is an example of changing the model (or framework) without changing any of the inputs.
We're also currently revisiting our equity and the fixed-income valuation models and will likely soon be rolling out some enhancements.
When it comes to our investment process, we are never satisfied. What has worked for us consistently for the past 10 or 20 years is not likely to have the same efficacy for the next 10 or 20. But we consciously walk the fine line between trying to fix something that isn't broken, which we never want to do, and evolving in a truly appropriate and industry-leading way.
This evolution can occur only if we build and maintain a cognitively diverse team. Doing so—be it from differences in background, education, or past experience—brings a fresh set of eyes to our process. Sometimes, it causes us to reaffirm what we are doing. But other times it leads us to think that there might be a better way.
Brian Singer, CFA
Partner & Head of William Blair's Dynamic Allocation Strategies Team
William Blair Investment Management