Chronicles of an Allocator

August 2023: Trends May Be Your Friend

Issue 41, August 2023

Authored by Christie Hamilton

On my first day of investment consulting, I was handed a copy of Pioneering Portfolio Management and told to get familiar with it. David Swensen had me at “rigorous investment framework,” and like many others in the industry, I adopted his model—including the dogmatic adherence to policy asset allocation primacy.

ONE WEEK LATER, Lehman Brothers collapsed taking equities, and a lot of other assets that weren’t supposed to be correlated with equities, down as well. It’s easy to forget the collective mood at the time - very “Elmo on fire .gif,”, but eventually markets recovered and with it, some lessons I learned:

  1. I am not David Swensen.
  2. “Contrarian” may sound exceedingly cool, but it feels very much so the opposite.
  3. Hard quant models underpinning modern theory are flawed. They may offer protection from cyclical trends, but leave the portfolio open to structural disruption. Remember: everyone has a plan for navigating change until a structural shift punches you in the face!

Thematic frameworks are powerful tools that help investors identify probable structural changes that tend to negate valuations. Many find this overlay crucial, given the current reversal of goldilocks trends that drove incredible growth over four decades. These headwinds, combined with standard cyclicality, make a perfect case for why “past performance is not indicative of future results” going forward.

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Thematic Investing Doesn’t Have to Become Your Whole Personality

To anyone out there clutching your pearls, consider many of us already engage in thematic overlays without realizing it by funding niche opportunities in sectors like healthcare or IT, solely on a gut feeling in future trends (e.g., aging Boomers or e-commerce in the 1990s, respectively).

Thanks to this McKinsey Report, developing a process to identify and implement those high conviction (if only in your gut!) themes can easily be incorporated without challenging establishment IPS. And it's also fun!

Also, here’s an example featuring common themes and mega-trends — plus a personal, spicy contrarian take or two!

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