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How to win at asset management: What basketball can teach us about money

November 20th, 2018 by Chris Shuba


I think basketball is a pretty easy game. Simply put, you put the ball in the basket as many times as you can until the game is over. It makes logical sense that to increase your chance of winning, you want to take as many layups as you can while minimizing your three-point shots, simply because you have a higher chance of making a layup and thus scoring more points to win. If the high-percentage layup isn’t an available shot, then you move further away from the basket until a shot can be taken.

So how come many advisors and asset managers start with a three-point shot and ignore the obvious layups when it comes to money management? Your guess is as good as mine, but here are a few characteristics of portfolio strategies that win while mitigating the urge to take the three-point shot.

  1. Consistency is more important than the boom-or-bust cycle. A lot of advisors make the same mistake when assessing strategies: Buying for the track record instead of the strategy itself. It’s easy to get wrapped up in the impressive returns posted by 5-star-rated funds, but history has proven the strategy’s strength – and that of the manager – are a better indicator of consistent return. Of course, you want strategy and returns to marry, but research has shown the best options are actually the 3- or 4-star funds that are consistent in that return and not sudden Wall Street darlings. Simply because a player gets hot for a few games doesn’t mean he can deliver those numbers for an entire career. Understanding why performance occurs is more important than the performance itself over time.

Interested to see how 5-star funds have performed over time as compared to 3- and 4-star funds? Check out this article from The Wall Street Journal that examines the performance over time. 

  1. The best strategies mitigate competitive risk. Just like basketball, the way to make money for your clients is by weighing probability and taking as many high-probability shots as you can. Unfortunately, there is often a disconnect between the interests of asset managers and your clients because the asset manager gets paid on flows (via basis points). The way to get the most flows is to obtain the best returns and/or star ratings relative to their peers. However, the only way to beat the peer group is by taking low-probability shots the others don’t take. When this pays off, it’s great for everyone, but when it doesn’t the client loses out big time. The most consistent strategies mitigate the competitive risk that leads to taking low-percentage shots.
  1. When diversification struggles, the entire portfolio goes down. Can you imagine if every player on the basketball court was identical in size, speed, skill, etc.? That wouldn’t make for a very good team because of the different roles needed to succeed. A portfolio that only uses diversification of holdings as the single risk-management principal is like having a team composed of identical players. Diversification should be one of multiple risk-management layers in a total portfolio approach. The traditional definition of diversification isn’t sufficient, either. It doesn’t mean to only diversify holdings. You also need to diversify the mathematical approaches behind the strategies. Retail investors are wise to take a page from institutional investors’ approach to diversification across asset classes. The Helios ecosystem approach – bringing together a combination of mathematical and research-backed strategies – is a prime example of this philosophy. If one area falters, the differentiation achieved across the ecosystem acts as a failsafe, further protecting the client. Just like a good teammate, if one of them struggles, the rest of the team can rally around her.
  1. Every problem requires a different solution. The best basketball coaches are always changing their lineup based on the team they’re playing and as the game evolves. The financial services industry has a natural tendency to “fire and forget” when it comes to establishing asset management strategies. The best and most consistent outcomes derive from the concept that everything will evolve. Likewise, the best and most consistent strategies adapt well. Advisors must be willing to adapt too and change course as conditions warrant. No game plan ever works exactly as laid out, so going into each investment strategy with an open mind toward evolution puts you in a position to make meaningful decisions in real time.

Unlike basketball – which is a highly emotional and exciting experience – the real key to winning at asset management comes down to taking the emotion out of investing and executing consistently in the face of adversity. At Helios, we believe unemotional algorithms deal with uncertainty better than emotional humans can. Win or lose, a basketball game is just a game. When it comes to investing, the stakes are much higher.

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