INVESTMENT PHILOSOPHY

At the heart of our investment philosophy lies the conviction that both ‘Return’ and ‘Risk’ should be analysed in a structured and integrated manner. Lots of investors get addicted to high returns and underestimate the risk factor. On the other hand, those who do acknowledge this factor but fail to properly analyse it will miss out on great opportunities. After all, a thorough analysis of risk in its various dimensions will bring you valuable data.

LONGER TERM APPROACH IS OUR CORE

Joint work by CIO Erik L. van Dijk and Nobel Prize Laureate Dr Markowitz forms the longer-term, strategic soul of our approach. But financial market participants, consumers, producers, politicians, central bankers and regulators do all suffer from periods of irrationality as a result of which pricing and valuation in markets can be inefficient. This creates opportunities for arbitrage, but it also leads to more risk than what we would have estimated based on a neo-classical old-style investment analysis. This holds for portfolio investments in more liquid asset classes, but it is even more true when contemplating illiquid, direct investments (private equity, venture capital, operational joint ventures and start-ups, etc.). It is therefore also necessary to link the longer-term structural approach to one that focuses first of all on the short-term aberrations and things that could go wrong.

ASSET ALLOCATION

Most people spend their time worrying about finding the right picks within asset classes. While it is in fact the allocation decision between those asset classes that explains the bulk of the differences in risk-adjusted returns. The Markowitz-Van Dijk approach covers more than hundred countries and half a dozen asset classes and therefore provides us with a solid strategic backbone in all economic climates.

Our approach does not assume that we are the only good top-down allocator. On the contrary. Using our factor models as screening devices, we also incorporate funds of top asset managers within our solutions. This ensures proper diversification between the views embodied in our top-down models and those of grandmaster specialists that will manage a bottom-up part of the fund solution(s) that we create. Analysis reveals that this approach is especially useful in periods of market confusion or crisis.

DIVERSIFICATION

All eggs in one basket’ is way too risky. Too many baskets and portfolio fragmentation make good risk management and oversight also impossible and it will add additional costs. At Parmenion we are convinced that diversification is the only ‘(almost) free lunch’ in a complex world with inefficiencies and illiquidities. Our sophisticated and quantative approach to diversification is embedded in work of CIO Erik L. van Dijk with Markowitz.

Our fund solutions will therefore always have ‘diversification’ as a core principle via its asset allocation; the selection of asset managers (active and/or passive; i.e. style allocation); country and/or sector allocation; currency and/or political risk exposure with last but not least Parmenion’s risk management department playing a key role in the overall optimization of our solutions.

BEST-OF-BREED

Reality teaches us that (active) asset management is art, science and top sports in one package, with different teams/companies being of grandmaster class in one or the other specialization. When you are top in Equities, you are not automatically good in Fixed Income as well. A US specialist is not the first manager to think about when you are looking for a China solution etc. Using our experience as institutional consultants to pension funds and other large end investors we have created proprietary databases with manager information (at the individual fund level). 

We will at all time ensure independence and diversification while demanding best-of-breed service from our selected managers. Diversification will warrant that no single grandmaster can dominate our solutions and we will also carefully check their performance. When the latter deteriorates, the manager will be replaced. But as long as our ‘stars’ deliver, we are more than happy to support them via our seal of approval and in communication with clients and prospects (via presentations, research, website etc.).

MAN-MACHINE

Although our philosophy is strongly based on a firm belief in thorough academic research as basis for feasible investment strategies, we are most certainly not ‘pure quants’. A model-based approach can never be the full story, but it is always a fantastic basis.

In the end pricing in financial markets is not rocket science but the result of supply-demand relationships between human market participants. And these humans will not just incorporate rational-economic factors in their decision process. Research by Nobel Prize laureates like Kahneman and Tversky has shown how important ‘behavioral factors (often biases)’ can be. And not just that: markets are constantly developing, and so are companies. All these elements translate into specific information that will not be incorporated in models. The experienced members of our investment policy committee (IPC) and portfolio management teams in the grandmaster managers incorporated in our solutions do constantly show how the ‘human touch’ can add value.

GLOCAL

Since in the end investing is about supply and demand of humans, we also believe in the added value of local expertise. In as much as investment and finance theory can be classified as ‘global’, local market inefficiencies and a logical focus on local giants by foreign investors translate into the necessity to have local expertise on board.

Our ‘Glocal’ approach takes this into account: top-down (GLOBAL) analysis of (sub-)asset classes and securities whose pricing is dominated by international factors, combined with the LOCAL analysis of more segregated, domestic investment opportunities. In Emerging and Frontier Markets this approach translates into collaborations with ‘local masters’: asset managers with recognized skills and size in their national markets who enable us to expand our universe of investment opportunities beyond what would be possible with a standard approach.

In the largest of all Emerging Markets – China – we benefit of course from the fact that we are part of GP Group: our colleagues at GP Shanghai provide us with inside/domestic possibilities of entrance in the world’s biggest economy. But in other Emerging Markets our China-linkage is helpful as well.

REAL ASSETS

At Parmenion we favor – helped by the enlarged broad universe of investment opportunities that comes with the GLOCAL approach – investments in Real Assets as opposed to a focus on financial engineering.

We do not oppose the use of derivatives or structured products per se, but we will only use them to the extent that these engineered approaches add one or the other element of value over an above what investment in underlying Real Assets could bring. This could be in the form of portfolio insurance/hedging; liquidity enhancement, arbitrage opportunities and/or substantial cost reduction. But we do not believe in financial engineering as the Holy Grail. A solid, broad-based investment portfolio should always be based on an investment in Real Assets with maybe up to 20 percent of the overall portfolio for finetuning purposes invested in financial engineering products.

NEW ECONOMY

Technological developments have triggered enormous change. This translates into a New Economy. Failure to take this into account will automatically make it hard to create outperforming investment strategies. Within our strategies we will – where feasible – incorporate New Economy-related themes. Because of our background, FinTech (new product/strategy developments where Finance and Technology go hand in hand) reserves special attention.

But the world is also changing in another, more conventional manner. The faster growth of Asian economies translates into less dominance of Western developed markets. Being member of a China-based group, we are part of this transformation back to a world where Asia leads economically; similar to how things were before the Industrial Revolution gave Western nations their 4 centuries of glory. China has just passed the US as largest global economy and we believe that in 2-3 decades India will also reach a comparable size, to make the New World also geo-politically and -economically a totally different one.

NEW ECONOMY

Technological developments have triggered enormous change. This translates into a New Economy. Failure to take this into account will automatically make it hard to create outperforming investment strategies. Within our strategies we will – where feasible – incorporate New Economy-related themes. Because of our background, FinTech (new product/strategy developments where Finance and Technology go hand in hand) reserves special attention.

But the world is also changing in another, more conventional manner. The faster growth of Asian economies translates into less dominance of Western developed markets. Being member of a China-based group, we are part of this transformation back to a world where Asia leads economically; similar to how things were before the Industrial Revolution gave Western nations their 4 centuries of glory. China has just passed the US as largest global economy and we believe that in 2-3 decades India will also reach a comparable size, to make the New World also geo-politically and -economically a totally different one.