Diversification is No Free Lunch

“There’s no such thing as a free lunch.” This well-known adage, popularized in economics by Nobel laureate Milton Friedman, communicates the idea that you never get something for nothing. The saying finds its origin in a former practice of American public houses, which would offer a ‘free lunch’ in order to attract clientele. These customers doubtless spent more than enough money on drinks to cover their ‘free lunch’. The saying is typically used in economics to emphasize the reality of opportunity cost. Opportunity cost is what one could have achieved by deploying scarce resources elsewhere.

In portfolio management, the opportunity cost of every dollar invested is the return we could have achieved if we’d invested it somewhere else. This is easy enough to measure after-the-fact (ex-post) – you should’ve just invested everything in the best performer! But before the fact (ex-ante) it is impossible to know which asset will perform the best. Ex-ante opportunity cost is more difficult to measure and must also account for differences in risk. This is why we diversify our investment portfolios. Diversification is a hedge against our ignorance of future outcomes. To the extent that you cannot clearly differentiate between the merits of several investment opportunities, it makes sense to hold all of them rather than just one.

Harry Markowitz, another Nobel laureate, challenged the no-free-lunch rule by saying that diversification is the only free lunch in investing. In essence he was saying that the opportunity cost of alternative investments cannot even be reasonably estimated ex-ante. Therefore the ex-ante opportunity cost of alternative investments is zero. Since the benefit of diversification is the spreading of risk, it would follow that this benefit is to be had at zero cost. If this is true, then indiscriminate diversification is the best investment strategy. But is it true?

Can we Measure Opportunity Cost ex-ante?

 For competing investments, opportunity cost is measured in terms of return potential and risk. Risk and return are ultimately driven by business quality and valuation. Differences in business quality and valuations are readily measurable, if not perfectly then certainly by broad brushstrokes. The problem is that higher quality businesses tend to trade at higher valuations, and vice versa. This means that for most investment alternatives, opportunity cost is difficult to measure. For most of the investment universe, Harry Markowitz was right. But ‘most’ of the investment universe is not ‘all’ of it. There are opportunities where one is able to find high quality businesses trading at low valuations. They just aren’t the norm. To the extent that really compelling investment alternatives do exist, but are scarce, the opportunity cost of diversification is actually enormous!

Picture it this way: The ideal investment portfolio has 3 desirable characteristics:

1) It consists of high quality businesses;

2) The shares of these businesses are well-priced;

3) The portfolio is highly diversified.

If it isn’t possible achieve (1) and (2) simultaneously, you may as well go all-in on (3) since diversification will cost you nothing – i.e. Markowitz. If (1) and (2) can be achieved in many cases, you can have (1), (2) and (3) without much opportunity cost. If (1) and (2) can be achieved scarcely, then you need weigh the opportunity cost of (3), because diversification is actually very expensive – i.e. “There’s no such thing as a free lunch.”

In our experience it is the third scenario that best describes reality, especially in recent years where market valuations have been generally high. This means that the opportunity cost of diversification has been high.

How do the Benefits of Diversification Compare?

 It’s one thing to say that the cost of diversification is high, but cost always has to be weighed against the benefit. So how do the benefits of diversification compare to the costs? Burton Malkiel, a strong proponent of diversification, demonstrated in his book A Random Walk Down Wall Street that by the time a portfolio reaches ~30 holdings (spread across different geographies/industries), virtually all the benefits of diversification (in terms of downside protection) have been achieved, with diminishing benefits for each additional holding. The only further advantage of holding more stocks is in tracking the benchmark index more closely. This isn’t desirable for the active investor.

What we see then is that diversification is actually very expensive with little benefit beyond a 30 stock portfolio. Consider then that most mutual funds hold well in excess of 100 stocks. This is not because they are concerned about downside risk. Rather they don’t want to be too different from the overall market. They are prioritizing their own career risk over their clients’ investment objectives. We addressed this in Dare to be Different. If you’re going to hold 100 stocks you may as well just follow Markowitz’ advice and go all the way. The results won’t differ by much.

How does this apply to us?

At Bellwood, we’ve always understood the danger of indiscriminate diversification and we’ve formulated our process to avoid this. For starters, we’ve emphasized the importance of covering a very broad opportunity set. The best way to ensure a diversified portfolio of well-priced, quality assets is to make sure you aren’t limited to a small opportunity set. A portfolio of 30 stocks chosen from a universe of 5 000 is likely to be vastly superior in terms of quality, price and diversification when compared to a portfolio of 20 stocks chosen from a universe of 500. Our process is geared towards addressing a very broad investment universe.

Further, we’ve worked on a maximum initial position size of 3%, which would result in an initial portfolio of 30-40 stocks. In practice, however, we’ve found that as prices fluctuate certain positions become smaller than 3%, while we’ve tended to trim the positions that have grown in excess of 3%, adding new positions along the way. This has resulted in the portfolio drifting from the initial 30-40 stocks to 40-50 stocks. Because of the scarcity of well-priced, high-quality securities this implies that over time we’ve inadvertently sacrificed a little either on price or quality in favour of greater diversification. This has probably cost us returns at the margin without meaningful benefit.

Going forward we’re going to cap our initial position sizes at 5%, with average position sizes still around 3%. This will result in slightly more concentrated portfolios which consistently remain around our target of 30-40 stocks. We believe this strikes the best balance between return potential and diversification.

Dollar Relativity

It’s been a tough year for stock market investors. The MSCI World Index has returned -25.6% in 2022 (measured in USD), on track for its worst year since 2008 and its 2nd worst year since the index started in 1970. ‘Measured in USD’ is an important consideration though – more so than usual – as the Dollar Index has risen 17% YTD. This is one of the biggest and fastest changes in the Dollar Index over the last 30 years. (The Dollar index measures the USD’s performance relative to a basket of major currencies.) The Rand has lost 12% against the Dollar in 2022, less than the 17% change in the Dollar Index. In other words, the Rand has strengthened against most other currencies. The Euro has lost 14% in 2022, the Pound 17% and the Yen a massive 20%.

The following table shows the year-to-date performance of the MSCI World Index (the global stock market) measured in these major currencies and in ZAR.

MSCI World Index 2022
YTD Return -25.6% -13.5% -9.6% -6.4% -15.6%
America vs the World

What in USD appears to be serious bear market, appears in most other currencies to be a ‘normal’ correction. How you perceive the current market movement has a lot to do with where you live and spend your money. If you’re in America, spending USD, then 2022 has been a bad year. If you’re in Japan, spending Yen, you’ve barely felt it.

The strengthening USD has been a trend since the financial crisis back in 2008. The following graph shows the performance of the MSCI World Index measured in different currencies, adjusting for the countries’ different inflation rates. This effectively measures how the market has performed relative to the cost of living in these countries.

There is a notable difference between the real USD return since 2008 and the real return measured in various international currencies. The difference between USD and EUR/GBP/JPY is far greater than the difference between ZAR and EUR/GBP/JPY. America has diverged from the rest of the world. What this means, in practical terms, is that the global stock market has done a lot less for Americans over the last 14 years than for people living in other countries, including South Africa. Relative to their cost of living, Americans have gained only 40% since 2008, while the British have gained 114%, the Europeans 138%, the Japanese 151% and South Africans 117%.

As South Africans we often think of the investment world in terms of domestic and offshore. This is a big mistake, in part because South Africa represents less than 1% of the world economy, but also because ‘offshore’ isn’t one big homogeneous basket as we so often imagine it to be. For starters there is a major distinction between the United States and the rest of the world. There is also a distinction between developed markets and emerging markets. The world is a big and diverse place.

So what can we take from this? 
  1. For international resident investors (including South Africans), the market movement in 2022 has been less severe than for American resident investors.
  2. We South Africans often measure ourselves in absolute terms relative to the USD, which paints a very bleak picture. While we do have severe domestic problems, if our currency were ranked on an international leaderboard (to borrow golfing terms), we’d be making the cut, not just in 2022 but even since 2008. There are bigger global forces at play than our local issues
  3. Key point: The global investment space is much bigger than America and the USD. ‘Offshore’ is not homogeneous. When you invest globally you are buying an internationally diversified portfolio with various underlying currencies, many of which are cheaper than the Rand. Don’t let one number – the USDZAR exchange rate – dominate your decision-making process when it comes to deciding whether to take money offshore. Consider the bigger picture.

Finally, we are constantly on the lookout for opportunities to invest in good businesses at attractive prices, wherever they may be. We’ve maintained significant USD cash balances throughout 2022. We’re well-positioned to take advantage of further market weakness. Far from being a disaster, the current market conditions are finally beginning to offer us a very welcome opportunity to deploy excess cash balances.

Effect and Cause

The MSCI World index lost 15.7% in the second quarter The ongoing conflict in Ukraine has continued to put pressure on global supply chains and commodity prices. US inflation increased to 8.6%, while the Federal Reserve rate increased from 0.5% to 1.75%. Consensus estimates are for a further 75bps increase at the end of July. There is also talk of a looming recession. So what do these indicators mean for the stock market? As investors, how should we respond to the economic data?

Should we time the market?

For many, the holy grail of investing is to find a reliable leading indicator for the stock market. Let’s say you had $ 10 000 to invest in 1970. Suppose you had a reliable indicator that could tell you in advance whether the stock market would earn a positive return or not in the following calendar year. Your strategy would simply be to hold either stocks or cash for that year depending on the indicator. If this was possible, then today (in 2022) your $ 10 000 would be worth nearly $ 7.3 million. If you’d simply held the stock index your $ 10 000 would be worth $ 800 000. That’s pretty good, but it’s only 1/9th of $ 7.3 million! You can see why the temptation to try and time the market, however futile that may be, is so powerful.

But suppose your indicator was not so accurate. What if it had you switching between stocks and cash a year late each time? Your $ 10 000 would be worth only $ 230 000. (The result would be very similar if you were a year early each time.) If you’re going to try to time the market, you need to be very accurate and herein lies the fatal flaw. An indicator that is a bit too early or a bit too late is worse than useless – it has negative value.

Economic data make poor market indicators

This is why economic data (GDP, unemployment, inflation, interest rates, etc.) are such poor stock market indicators. They’re always late. Yes, there is a causal relationship between the stock market and the economy, but the stock market reflects the expectations of investors looking at the future economic outlook rather than present conditions. The effect comes before the cause! The stock market is a leading indicator for the economy, instead of the other way around, even though the economy is the cause of the stock market’s returns.

A simple analogy is helpful: Roosters typically start to crow before the sun rises. Even though the rooster crows before the sunrise, it doesn’t cause the sun to rise. Instead the coming sunrise causes the rooster to crow. The effect comes before the cause. The rooster is a leading indicator for the sunrise, even though the sunrise is the cause.

Trying to time the stock market using economic indicators is like waiting for the sun to rise and then expecting the first rooster to crow. By the time the economic data comes, you’ve already missed the market move. The stock market is such a leading indicator that by the time expectations of future economic data have changed, you’ve already missed it.

What about other indicators?

So economic data are a no-go for market timing, but what about other indicators? Some clever analysts may run all kinds of back-tests to find indicators that would have been accurate (with hindsight), but the list of successful investors who have built their track records by consistently timing the market is a very short one. Back-tests and reality are worlds apart. The reality is that there simply isn’t a consistently accurate leading indicator that can tell you when the next stock market drop will happen. Despite this, not a year has passed since the last crisis that some prominent investor hasn’t predicted the next one. A broken clock tells the correct time twice a day, but that doesn’t make it useful.

There are however some useful indicators that can tell you whether long-term returns are likely to be high or low. But since even low long-term stock market returns are usually positive, it makes these indicators of little value for market timing. It doesn’t help being right about below average market returns for the next decade, but sitting in cash and earning an even lower return. Time is not your friend when you’re trying to time the stock market. If you’re a long-term investor the stock market is the place to be.

Time horizon vs. timing

The following table shows the history of returns for the global stock market since 1970. The first row of each block shows the annual return for that year. The second row shows the annualized return for the 7-year period ending in that year. While the 1-year returns are volatile and unpredictable, the long-term returns are more consistent. There hasn’t been a negative 7-year return* since the total return data for the MSCI World Index was tracked in 1970.

* Past performance is not an indication of future performance.

Invest in superior businesses through the cycle

So if these long-term indicators aren’t useful for market timing, or even for timing specific stock purchases, then what are they useful for? They can help us identify superior businesses that are priced for superior long-term returns. The strategy is to invest in these types of businesses over the long-term, through the unpredictable market cycle. This means we need to stomach the inevitable volatility along the way and not panic every time the market drops. Instead use these drops as an opportunity to add to your stock portfolio.

The list of successful investors who’ve built their track records this way is a much longer one. People like Warren Buffett spent little time trying to time the market or predict the economy, choosing instead to focus on business valuations, profitability and balance sheets. These are the same factors we focus on at Bellwood.

So what is the best approach to manage the market volatility? Don’t make investment decisions based on economic data. Follow a risk-based approach to asset allocation instead of trying to predict short-term returns and time the market. This means having enough cash and liquidity set aside to meet near-term and contingent liabilities and investing the rest in growth assets for the long-term, through the cycle.

Once you have this strategy in place, the most important thing is to maintain your discipline, especially when markets are falling. Emotional decisions are seldom good decisions. Don’t deviate from your financial plan. We won’t deviate from our investment process.

Inflation, Interest Rates and Stock Prices

One of the most significant changes to the economic landscape over the last year has been the return of inflation. The US inflation rate has risen to 7.9%, the highest reading in 40 years. US inflation has averaged roughly 2% for the last decade and 3% in the 20 years prior, peaking at 5% in 2008. It remains to be seen whether this spike in inflation is in fact ‘transitory’ or not. Many policymakers seem to be abandoning that view now.

Quantitative easing and sustained easy monetary policy have contributed to the potential for higher inflation for some time. But COVID-related supply chain issues and the Russian invasion of Ukraine are the two most immediate causes. The former has resulted in shortages of various goods and higher shipping costs. The latter has led to a spike in global commodity prices, including energy.

Inflation has a direct impact on what we pay for things. It also has a big impact on interest rates. Most central banks aim to curb inflation by raising interest rates. The theory is that when the economy runs too hot, interest rates can be raised in order to cool things down again, and vice versa. The problem is that interest rates are a bit of a blunt tool when it comes to controlling international supply-driven inflation – such as we are now seeing. Higher interest rates in America have little direct impact on the war in Ukraine or shipping from China. They may dampen domestic demand though.

Nevertheless, it seems likely that central banks around the world will respond with higher interest rates. This in turn will have other implications. Our primary concern is how higher inflation and higher interest rates are likely to impact stocks and other assets.

First, higher inflation means higher costs for companies.

However, since the global stock market represents the bulk of the global economy, it stands to reason that one company’s higher cost is another company’s higher revenue. In aggregate, the stock market tends to pass through the effects of inflation. There may be winners and losers depending on the nature of inflation. Good quality businesses are better able to pass through inflation effects.

Second, higher interest rates mean higher debt financing costs.

Companies which have a lot of debt are likely to come under pressure as interest costs mount. The impact of higher interest rates is not so easy to pass through as inflation. In a rising rate environment, overindebted companies will come under pressure.

The low interest rate environment that has prevailed since the ’08 financial crisis has spurred a wave of debt-funded stock buybacks. Companies have taken advantage of the low interest rates to raise debt at almost no cost. They’ve used the proceeds to indiscriminately buy their own shares on the stock market. This has the dual impact of increasing the leverage of these businesses, while simultaneously creating (artificial) demand for their shares. This pushes their share prices higher. It will be interesting to see the effect of this trade unwinding should interest rates start to bite. Not only will earnings come under pressure, but a major source of buying demand will disappear. Should they need to raise equity in order to pay down debt, the effect will be inverted, albeit in a less orderly fashion.

Finally, higher interest rates mean higher discount rates for assets.

When pricing an asset, expected future cash flows are discounted at a rate (the discount rate) to derive a value for that asset. The higher the discount rate, the lower the value of the asset. Central bank interest rates provide a reference point for all other discount rates. When interest rise, so do the discount rates for other assets, implying lower valuations.

The simplest way to demonstrate this is with a government bond. A bond has fixed cash flows on a predetermined schedule with a defined maturity date. This means that the only variable affecting the price of a bond is the discount rate. Higher interest rates => lower bond prices, and vice versa. For any given yield, you can calculate the bond price. As such, bond prices are usually quoted as a yield (which is the discount rate).

Stocks are a little more complicated. Their future cash flows are highly variable and they have no defined maturity date. This means that the discount rate is just one factor. At one time it may be a dominant factor, and at other times be overshadowed by other factors. All else equal, higher interest rates should lead to lower valuations for stocks, which generally means a lower PE ratio.

Interestingly, small changes in discount rates have the biggest impact on valuations when discount rates are very low (i.e. valuations are very high). This makes highly valued assets more sensitive to changes in discount rates than cheaper assets. (This effect is referred to as ‘convexity’ in fixed income management.)

History shows the relationship between inflation and asset valuations.

Since interest rates tend to follow inflation rates, we’d expect to see an inverse relationship between PE ratios and inflation rates over long periods of time. The last 70 years of stock market history demonstrate a weak inverse relationship between the S&P 500’s PE ratio and US inflation. This weak relationship became a lot stronger during the ‘70s and early ‘80s when high inflation was a major factor.

Source: Bellwood Capital, Bloomberg.

Inflation also impacts other assets.

As we already alluded to, bonds are highly susceptible to inflation. This is because they have no mechanism for adjusting the predetermined cash flows to reflect increased inflation. Should we enter a sustained period of high inflation, bond returns are likely to be poor as interest rates rise and bond prices fall.

Property is somewhat similar to the stock market, but since debt-funding is more prevalent, interest rates tend to have a greater impact.

Inflation obviously erodes the value of cash, although higher interest rates tend to compensate for this. (Unless your cash is under your mattress.)

Gold is considered to be an inflation hedge, but with a lot of volatlity (much like other commodities). Over long-periods of time however, gold fails to match the returns offered by productive assets.

There are several implications for equity investors.

Although high inflation is not a good thing for stocks, stocks remain the best long-term inflation hedge. This is because of their ability to pass through inflation over time. The best ways to mitigate the impact of high inflation on your investment holdings are to:

  1. Maintain a reasonably diversified portfolio of high quality businesses, which can pass through the cost pressures of high inflation;
  2. Avoid over-indebted companies, which may become distressed as a result of higher interest rates;
  3. Avoid over-valued stocks where small changes in discount rates will have the greatest impact on valuations.

These three points really sum up our investment process: Acquire and maintain a diversified portfolio of profitable businesses with strong balance sheets at attractive prices.

Remember, inflation is notoriously difficult to predict. We don’t know if we’re headed for a repeat of the ‘70s/’80s, but we can and should always follow a robust investment philosophy and process.

Mind the Gap

In 2021 we worked through a total of 1 927 companies across the globe. These are largely representative of the global opportunity set and include just about every major listed company in the world. These 1 927 companies have a combined market cap of $78 trillion. For each company, we estimated an expected return, which updates in real-time as prices and underlying fundamentals change. By aggregating this data, we can draw some inferences about what the global stock market looks like today, from a bottom-up perspective.


Generally, investment managers derive their market views from a top-down perspective. In other words, they make macro growth forecasts for entire countries/regions and industries. They then allocate capital accordingly working their way down to the individual businesses. We work from the opposite perspective. Since our aim is to invest in a portfolio of individual businesses, we don’t usually spend much time building views on overall markets. Nevertheless, it can be instructive to examine the results of such analysis and assess prevailing macro conditions.

Developed vs Emerging Markets

One such condition is the valuation gap between developing and emerging markets. Top-down economic analysis suggests that developing markets (the US in particular) have the most favourable economic conditions for investment. However, this ignores the underlying asset valuations, just as it did a little over a decade ago when the macro conditions were the opposite. What is important is not prevailing economic conditions, nor recent returns, but future investment returns. A decade ago, emerging markets had outperformed, conditions looked favourable – but returns have since disappointed because valuations were too high. Today, it would appear, we are seeing the opposite extreme:

Estimated Return is based on Bellwood Capital’s aggregated analysis of long-term return prospects for companies and is not guaranteed.


What is immediately clear is that our expected returns for emerging market assets are much higher than our expected returns for developed markets*. This is consistent with the relative valuations. Our portfolio weights are also tilted towards emerging markets. We also hold a significant amount of cash in lieu of developed market exposure. Remember that we do not target regional exposures based on macro forecasts. We look at individual opportunities and maximize exposure within our risk management framework. The overall weights come out in the wash, so to speak, but it is reassuring to see the consistency.


* This probably understates the gap since we tend to use conservative inputs when assets appear cheap (i.e. they’re competing for a place in our portfolios) and a more optimistic inputs when assets are wildly overvalued.

Valuations drive returns for broad markets

Looking at the above data, one could conclude that our expected returns are simply a function of valuations. This would be overly simplistic because growth rates (and yields) are just as important as valuations. Return = Yield + Growth + Revaluation. When we’re dealing with individual companies a difference in growth rate often outweighs a difference in valuation. But when we aggregate entire regions, differences in long-term growth rates tend to be a lot smaller. Most of the variation in long-term returns is attributable to differences in valuation. This impacts not only revaluation, but also yield. For this reason, the inverse relationship between valuation and expected long-term return for a region tends to be very strong.


It’s also important to note that our exposure within developed markets is not the average of those markets. The United States and Europe are enormous opportunity sets. Even though they are expensive in aggregate, there are still good individual businesses that are priced for high returns by our estimation. We do not allow our macro views to dictate where we invest, nor do we invest in aggregate markets. We invest in diversified portfolios of individual businesses, based on their individual merits, from around the globe.


The valuation gap (and hence the expected return gap) between developed and emerging markets is very high at present. While recent returns and macroeconomic forecasts appear to suggest the superiority of developed markets, it is valuations that will likely drive long-term returns in the future. We are comfortable to maintain our tilt towards emerging markets, while adhering to the limits established in our overall risk management framework.


The overconfidence effect is a well-established bias in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high. Overconfidence is one example of a miscalibration of subjective probabilities. Throughout the research literature, overconfidence has been defined in three distinct ways: (1) overestimation of one’s actual performance; (2) overplacement of one’s performance relative to others; and (3) overprecision in expressing unwarranted certainty in the accuracy of one’s beliefs. The most common way in which overconfidence has been studied is by asking people how confident they are of specific beliefs they hold or answers they provide. The data show that confidence systematically exceeds accuracy, implying people are more sure that they are correct than they deserve to be. – Wikipedia

September saw markets give up some of the gains we’ve seen in the very strong run since March 2020. The realities of COVID/lockdown related supply-chain issues, quickening inflation and political uncertainty around the globe seem to be finding some acknowledgement in financial markets. There is a heightened sense of apprehension. Most investors we speak to have two questions: 1) What’s next? 2) How should we position ourselves?

“What’s Next?”

COVID and the resultant lockdowns have had a knock-on effect on global supply chains. This has led to shortages in a number of key areas. Shortages lead to price increases. The US inflation rate is currently north of 5%, a level breached only once previously in the last 30 years (mid-2008). The Fed tells us this uptick in inflation is transitory, but inflation is notoriously difficult to predict. Inflation has implications for interest rates, and interest rates for asset prices. There’s also the question of what impact trillions of dollars of stimulus will have on inflation and asset prices, not to mention a host of other issues which further compound the uncertainty of the future.

And that’s really the answer to the question of “What’s next?”: Uncertainty. The future is and always has been uncertain. We don’t know what inflation will do next, nor do we know exactly how financial markets will react. And that’s just concerning inflation. There are many other important factors that we also know very little about.

Contrast this basic truth with what you see daily in the financial media. There is no shortage of pundits brimming with confidence ready to tell you precisely what the future holds. Ironically, you’ll find someone to confidently express whatever you want to hear. Their accuracy is nowhere near their confidence. Of course, the media houses will parade the ‘winners’ who got their calls right in the last round for as long as their credibility lasts. There are always people predicting everything, so it’s easy find someone who got it right after-the-fact. Consistently doing the same ex-ante is a different story.

The reality is that no-one seems to be able to consistently predict the future. And even when we do make correct predictions, markets often don’t react the way we’d have anticipated. This makes prediction-based investing problematic, and prone to error.

“How should we position ourselves?”

When we’re asked the questions “What’s next?” and “How should we position ourselves?” the implicit assumption is that the answer to the second question depends on the answer to the first. But unless you’re able to answer the first question with a high degree of accuracy (vs. confidence), it should have very little influence on the answer to the second question.

Because we don’t know what the future holds, nor how markets will respond to specific events, we need to aim for a robust portfolio that is likely to deliver good results under a wide range of future scenarios, and stick to it. Discipline is by far the most underrated trait of successful investors. In an industry where everyone is ‘clever’, and as a consequence overconfident, discipline is the key to avoiding costly mistakes and achieving consistent results.

The problem is that there tends to be a very large gap between our perceived accuracy (i.e. confidence) and our actual accuracy. This is overconfidence. We need to think soberly about our ability to predict the future.

One of the biggest mistakes that investors make is to reposition their investment portfolios in a major way in anticipation of some future event of which they are confident they know the outcome. Time and time again investors will sell out their portfolios or go all-in on a specific asset/industry/geography, abandoning a sound investment plan and setting in motion a series of behavioural biases that make it very difficult to get back to where they should be. It takes just one big mistake like this to derail a successful investment journey. Now we can always get back on the right track, but it can be difficult, and these mistakes can be costly.

An example…

Let’s say you sold everything in 2016 as RBS suggested, predicting an impending global deflationary crisis. By the end of the year, global stock markets had risen 18%. What now? Do I buy everything back again? If so, on what basis? By this time there’s a good chance you’ve set an anchor around the level you sold. “If the market just gets back to where I sold, then I’ll buy everything back.” So we give it some more time… In 2017 markets climbed another 24%.

This chain of events leads either to a kind of financial depression where you never get back to your target portfolio, or capitulation where you take your medicine and move on. The longer you wait, the more difficult it becomes to swallow the medicine. Granted, you might get lucky, but those stories are the exception rather than the rule. It’s better not to put yourself into this kind of position.

So what does a robust portfolio look like?

A robust portfolio first has the correct asset allocation. This means having enough cash to meet short-term liabilities, and enough risk assets to meet your long-term liabilities. Next, a robust portfolio is focused on high quality assets with reasonable valuations. The portfolio must also be diversified in terms of industries and countries, but not to the extent that quality or valuations are compromised. Finally, a robust portfolio avoids excessive leverage, which triggers liquidation during a crisis.

Any major changes in your overall investment portfolio should aim to draw you closer to your ideal portfolio, not away from it. Once this portfolio is established, do not allow “What’s next?” questions to draw you significantly away from it. If you are going to entertain these questions, keep the changes small. Better yet, if you spend less time thinking about these questions, you’re less likely to make these kinds of mistakes.

Finally, it’s worth remembering that against a backdrop of perpetual uncertainty which included the Great Depression, WWII, numerous recessions, wars, market crashes, inflation in the ‘70s, the tech bubble, the housing bubble, etc., the last century has seen the S&P 500 index grow from 4.4 to 4400, not counting dividends.


Country Risk

When managing a global portfolio it’s important to have a handle on the risks inherent in the places we’re investing our funds. The approach most investors take is similar to the approach with which they assess individual stocks: Do I recognize the name and how does it make me feel? This really isn’t adequate, especially when it comes to emerging markets. As with smaller individual stocks, which many investors overlook, there are good businesses operating in smaller countries that actually score well on country risk metrics. These countries are often simply overlooked because of their size.

On the other hand, just as there are some major companies with questionable quality, there are also some major countries where the risk is greater than investors realize. It’s good to have a handle on the relevant metrics and also to see how they change over time.

It’s also interesting to see how our own country stacks up against other international markets. We tend to have a bias towards that with which we are familiar. We often consider other countries with far less risk than our own to be uninvestable, while having the vast majority of our assets invested here where the risks are often greater. (Also read SA Foie Gras.) If the specifics of the analysis aren’t of interest, scroll down to the last two paragraphs and see how South Africa fares – some food for thought.

How do we quantify country risk?

The first issue we need to address is how to make an accurate assessment of country risk. Most investors approach this as they do with every other aspect of investment: Stories and predictions. What does the economic growth outlook look like, what industries are growing and which countries feature prominently, etc. Our approach is somewhat different. We focus on the preconditions that make for a favourable economic and investment environment, rather than unknowable predictions of the future.

For us, the most important factors when considering country investment risk are respect for property rights, and investment freedom. The Heritage Foundation generates such scores for countries, which are described as follows:

1. Property Rights

“The property rights component is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. It measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws. It also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts.”

2. Investment Freedom

“In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities both internally and across the country’s borders without restriction.”

Using the Heritage Foundation’s scores for these two variables, we generate our own composite and rank countries accordingly.

Secondary Factors

While our primary assessment of country risk is based on respect for property rights and investment freedom, there are a number of secondary factors that we also take into consideration. We consider scores for business freedom (how easy is it to start and run a business?) as well as labour freedom (how onerous is labour regulation?). We also look at the size of a country’s economy (larger economies are inherently less vulnerable), their inflation rate (avoid hyperinflationary environments) and their debt picture.

Finally, we consider measures of income inequality (e.g. GINI coefficient) and poverty. Countries with income disparity and poverty are more prone to civil unrest.

How do we manage country risk?

Based on our assessment of both primary and secondary risk factors, we establish upper limits to individual country exposure. Essentially we classify countries as Tier 1 – 4. Tier 1 is most investable, and Tier 4 is uninvestable. We set higher limits for more investable countries, whilst also giving consideration for the size of the markets. While United States and New Zealand may both be classified as tier 1, our exposure to New Zealand is necessarily limited by the size of the opportunity set. We also set overall tier limits so that we don’t overexpose ourselves to low tier countries in aggregate.

Note that we don’t set exposure targets like most investment managers do. This is because we aren’t benchmark cognizant. We set upper limits and then maximize exposure to our best investment ideas (specific stocks) within these constraints. If we don’t have good ideas in a certain country, we don’t invest there. Most investment managers set geographic exposure targets. This means that they must maintain significant exposures to the United States, Japan, UK, etc., irrespective of where their best investment ideas are. This is suboptimal in our view.

Results by Primary Score (0-100)

Countries with GDP greater than USD 150bn:


Results by GDP

Top 30 Countries by GDP:

So how does South Africa stack up?

Since most of our investors are South African, we should consider where South Africa ranks both in terms of primary factors and secondary. This has obvious implications for the domestic/offshore exposure debate. We’ve long argued that the traditional local/foreign exposure paradigm borrowed from the US/Europe makes no sense for local investors. Our economy is less than 1% of the world and we face far greater risks than 1st world countries.

Categorizing the world between South Africa and Offshore and placing these two options as equals is ludicrous.

South Africa ranks 43rd of 55 countries with GDP greater than USD 150bn, on property rights and investment freedom. This isn’t surprising given our government’s policies regarding land expropriation, capital controls and the endemic corruption we face.

Further, on secondary measures, we’re a small economy which scores relatively poorly in terms of business and labour freedom. We have the highest income inequality score of any country in the world. 55% of our population lives below the poverty line. Do we see civil unrest in our country? Our debt is also growing rapidly. The only bright spot is that our inflation is under control, for now.

Invest by merit, not familiarity

I don’t want to paint a picture only of doom and gloom. Brazil, Russia, India and China score roughly the same as us (though they are larger economies with less inequality and poverty). Many consider these countries  to be viable investment destinations. But we need to be realistic when we compare South Africa to other investment destinations and when deciding how much to invest “offshore”. For a global investor, the reality is that South Africa is a borderline investment destination.

If I suggested that you invest half your money in Brazil or Thailand or Mexico or Turkey or Poland or Hungary or Chile – you’d call me crazy. Yet these are mostly bigger economies than South Africa. They all score better on the primary and most of the secondary country risk metrics. Then there are more developed economies like Taiwan, Norway, Israel, Australia, Canada, Sweden, Hong Kong and Singapore. Not to mention the giants of United States, Europe and Japan. These are all unquestionably superior investment environments.

As global investors, we should consider the scope of investment opportunities and the inherent risks when making offshore allocation decisions. It’s high time we abandon the traditional local/offshore allocation models. Our local investments should compete against the global opportunity set on merit, not familiarity, for a place in our portfolios.


What does it take to achieve extraordinary returns?

Three years ago we wrote an article called The One Percent  in which we discussed the advantage of being able to cover a very wide opportunity set. It’s all very well getting the basics right in terms of stock analysis, but if your ability to apply that process is limited to 100 stocks, it really doesn’t help much. You’ll either be forced to invest everything in your best couple of ideas, forgoing diversification. Otherwise you’ll water down your process in order to diversify. Most investors, particularly professionals, will favor the latter.

Few investors, even professionals, are able to scale a good investment process consistently beyond a few hundred stocks. This is because a) their process doesn’t lend itself to scaling across different industries, countries, etc., b) they lack the resources to look beyond the major index constituents, c) their clients have limited their mandate to a specific subset of the global market, d) they are comfortable to limit themselves to names they’re familiar with, or e) they are unaware of the problem.

Further, most institutions that do have very wide coverage (investment banks for example) employ 100s of analysts across the globe with very little consistency. This means that they have no mechanism for consistently identifying their best ideas. They piece together various industry and country portfolios to arrive at one over-diversified global portfolio. They may as well run an index fund.

Minimum Requirements

In order to achieve extraordinary results, we need to do something extraordinary, which requires – at a minimum – the following:

  1. A scalable process that can identify good businesses trading at good prices;
  2. The ability to apply this process consistently to a very broad opportunity set. The wider the opportunity set, the better the potential portfolio;
  3. The desire and the intestinal fortitude to select only a portfolio of best ideas, even if it looks nothing like the benchmark index.

Note that 2 of the 3 won’t cut it. A great process applied to a wide opportunity set, but then over-diversified or constrained by benchmarks won’t result in extraordinary returns. Going with your best ideas won’t help much if they aren’t any good. And you won’t find too many great ideas if you can’t sufficiently cover the global opportunity set.

How do we stack up?

At Bellwood we aim to tick all 3 boxes. We are relentlessly focused on process and we have very wide coverage of the global stock market. We’re continuously developing our capabilities on both fronts. Finally, our active share is ~95%, demonstrating our commitment to building best ideas portfolios.

Some examples of the fruits that have been borne by this process since 2018 include: Kakaku.com, Evolution Gaming, NetEnt, IGG, XD, Thule, Systena, Challenger, Banco Santander Chile, Mexican airports, and Silicon Motion. These have contributed substantially to our returns, especially over the last year. You won’t find these stocks featuring in many other portfolios.

Going forward we’ll keep searching for investment ideas like these, and we’ll keep building portfolios that reflect our conviction in this process, which is anything but ordinary.

Investing in the Misinformation Age

If the last half-century was the Information Age – a time of rapid progress in terms of access to information – I think it’s fair to say that we’ve gone beyond that and crossed firmly into the Misinformation Age. COVID and the US Elections have demonstrated how easy it is to deliberately spread extremely polarizing disinformation on both ends of the opinion spectrum. This kind of disinformation can influence behavior significantly, sometimes impacting masses of people. This has always been true for financial markets (though probably with less malice) where mass euphoria and mass hysteria have driven market cycles to opposing extremes for centuries. What has been the cause of this? Too much information. More specifically, too much of the wrong information.

Financial media – or business entertainment if you prefer – has always pushed the excitement factor of investing. Big success stories, dramatic meltdowns, outliers and extreme performers, bold predictions made with absolute confidence, exciting growth stories and edgy investing trends. Balance sheets and valuations are far too boring for TV.

The key to successful investing is being able to sift through the ocean of misinformation and find that information which has some value. Ignore everything else.

Focus on things that are knowable and important

At the 1998 Berkshire Hathaway annual shareholders’ meeting, Warren Buffett was asked about his views for the global economy over the ensuing decade. His answer was that he focuses on things that are important and things that are knowable. The future global economic environment? Unknowable.

More than 20 years later, with more ‘information’ at our fingertips than ever before, this advice is probably more relevant than ever. A useful framework for assessing information is to categorize everything according to the following matrix:


Quadrant 1

Quadrant 1 represents information that is both knowable and important. This is where Buffett would recommend we focus our attention. This includes things like current valuation, financial strength of the business, cash flow, rough financial estimates, some ballpark scenarios of how the business is likely to develop over the long-term, competitive position of the business, profitability, etc. Although this information is readily available, it isn’t very exciting. We don’t see much attention drawn to this quadrant in our business entertainment. This provides an edge to those who are willing to forgo the entertainment factor and keep discipline with a process focused on these things. That’s what we do at Bellwood.

For individual investors, information about the fees you’re paying to advisors (and fund managers and product providers), as well as the transparency of your investment structures is critically important yet often ignored. Most investors would do well to spend the time looking into this.

Quadrant 2

Quadrant 2 represents information that is knowable, but not important. This probably represents the bulk of what is produced by financial media. It includes things like the discussion of daily market fluctuations, arbitrary economic data points, precise quarterly earnings numbers, endless expert opinions, etc. It could be summed up as over-analysis. Investors can easily make bad decisions when they become distracted by irrelevant information or suffer from analysis paralysis.

In practice, professional analysts spend their days learning about every detail of an industry or company. The vast majority of this information isn’t useful for the purpose of making investment decisions. Worse, too much useless information can lure you into the trap of focusing on the wrong information. It becomes a distraction. Knowing a lot about something isn’t the same as knowing what’s important.

Quadrant 3

Quadrant 3 represents information that is important, but not knowable. In other words, if you could know it, it would be very useful, but you can’t. The investment industry spends a lot of time and money trying to get at this info and convincing themselves that they do indeed know it. The timing of the next market crash, 12-month target prices, 2021’s outlook for the dollar, the next recession, upcoming election results, etc. CNBC has no shortage of gurus ready to tell us all when the next big meltdown is coming. This despite their terrible track record of getting these calls right in the past.

In day-to-day practice, most fund managers take a top-down approach based on macroeconomic forecasting which informs their asset allocation, geographic allocation, industry allocation, etc. Bottom-up stock selection is an afterthought, often also built on predictions or narratives, despite the evidence that this approach doesn’t add value.

Quadrant 4 represents information that is neither knowable nor important – things we don’t know, that have little impact on investment outcomes.


I’ve highlighted quadrants 2 and 3 in red because these are the areas where most investors get side tracked to their detriment. These areas are also where the business entertainment tends to focus. If you want to become a better investor, think about the information you consume and start to categorize it according to this matrix. Then spend less time in quadrants 2 and 3 and more time in quadrant 1. Professionals would also do well to direct their resources away from analysis and development of models focused on quadrants 2 and 3 towards quadrant 1.


A Practical Example: ZAR Blinkers

We’ve written about this before in Don’t let the Rand dictate your portfolio but this example is so prevalent that we need to highlight it again. Most South African investors recognize the need to invest globally. But when it comes to pulling the trigger there is one factor that drowns out all other considerations: The ZAR exchange rate. If I were to categorize this in terms of our information matrix, I’d put it somewhere between quadrants 3 and 4. Definitely unknowable with debatable importance.

Although the exchange rate is important when viewed in isolation, it is only one of a number of other important factors that impact your investment returns. Once due consideration has been given to all of them, the exchange rate becomes far less important. When investing in a global portfolio there are many currencies, not just USD. These exchange rates are also important, and some of them are also cheap. What about valuations of the actual assets you’re buying? These are of far greater importance than the exchange rates.

Right on ZAR, but wrong overall…

What can we know about the ZAR exchange rate? We can know that over time it is likely to follow a weakening trend against most developed market currencies. We can also identify extremes in the exchange rate, though we can’t identify inflection points with any accuracy. Short-term moves are unknowable. The same is true for stock market valuations. But we often find extreme ZAR weakness is accompanied by depressed stock market valuations. What you lose on the one, you tend to gain on the other. This makes short-term moves less important.

Let’s go back to 3 April 2020. The USD.ZAR exchange rate was 19.04. At 31 December 2020, the exchange rate was 14.69. Many investors sitting on cash earmarked for offshore investment would have balked at the idea of taking money offshore at 19.04 to the USD. So they sat on their cash and waited. Come December, 14.69 looks a whole lot better – 23% stronger – well done. Only… the MSCI World Index rose 54% in USD (18% in ZAR) over that time. So we got the exchange rate right, but we’re worse off by 18% overall because we weren’t paying attention to the other important factors.

Risk management is important

Another important consideration is how much of your wealth is focused in South Africa. Most South African investors have the vast majority of their wealth focused in South Africa (which represents less than 1% of the world). They send money offshore because they need to manage their risk (and they want to take advantage of the wider opportunity set). But some like to speculate on the currency by bringing it back when the Rand seems weak, hoping to take it out again at a better rate. This is a dangerous game to play when you consider that the Rand is highly unpredictable. It is also only one of many other factors that affects your total return. Finally, the principle of risk management through global diversification (which falls squarely into quadrant 1) should dwarf any potential return from playing the exchange rate over time.

As South African investors, we put far too much importance on the exchange rate when it comes to global investing.


Two other common examples that investors should beware of:


  1. Trying to time the next market crash. You’re better off focusing on asset allocation and investing consistently through market cycles;
  2. Making investment decisions on the basis of big macro themes or stories: The Dollar, the Fed, QE, China, aging population, green technology, etc. These are difficult to predict and even more difficult to quantify. You’re better off building a globally diversified portfolio focused on simple investment fundamentals at the micro level.


When making investment decisions, don’t fall into the trap of being distracted or blinkered by considerations that fall into quadrants 2 – 4. Focus solely on considerations that fall into quadrant 1. Rather blinker yourself from the ocean of other misinformation out there. You’ll achieve better results over time.

Responsible Investing Hypocrisy

Socially responsible investing (SRI) continues to gather momentum in the investment industry, and is becoming increasingly popular amongst private investors. The idea is that investors allocate their capital to socially responsible businesses. There is some subjectivity as to what constitutes social responsibility, though ESG scoring (environmental, social, governance) is one widely accepted approach. Consideration can also be given to broad themes such as investing in renewable energy or electric cars for example, or not investing in certain industries such as tobacco, oil & gas, defense, etc.

Since we manage individual portfolios, we engage with our clients individually in this regard, whilst taking an overarching view on the long-term viability of any specific business that we invest in. This is fairly straightforward and for us it makes more sense than taking a one-size-fits-all approach.

But underlying this SRI movement is an incredible hypocrisy. We have an industry that for decades has peddled opaque, complicated, unnecessarily expensive products, riddled with conflicts of interest, now preaching social responsibility to its clients. Many in the investment industry even see SRI as a marketing hook to sell more of the same products:

Fee pressure behind ‘push on ESG’ – FT Adviser (8 Jun 2020)

Firms see embrace of ESG as way to garner more fees – P&I (24 Feb 2020)

There’s also the issue of ESG window dressing to consider – a topic for another day perhaps.


At Bellwood, responsible investing starts at home with the way we treat our clients. There are three major areas where we differentiate ourselves from the rest of the industry: Transparency, cost-effectiveness and alignment of interests. Unless the rest of the industry addresses these issues properly, SRI will be just another marketing smokescreen.

Let’s examine each of these areas and provide practical examples of how they apply in day-to-day business:

Transparency: How many layers are there between you and your money?

For a South African, a typical foreign investment starts with your financial advisor placing your funds on a local platform that invests in a global feeder fund that invests in an offshore fund, very often a fund-of-funds, which invests in several other offshore funds, which finally invest in various stocks, bonds, etc. That puts four or five layers between you and your underlying investments. There are variations on this often featuring asset swaps, endowments, wrappers and other financial products. The result is complexity, lack of transparency, inflexibility, limited access to your funds, and excessive costs.

Here are some questions to ponder: Do you know what your underlying investments are? Do you understand the underlying investment strategy? Does your adviser? Can you speak to the person who actually makes investment decisions? Are you able to access all of your funds anywhere at any time? Do you know what fees you’re paying through all the layers, or do you just see the top layer? Is it necessary to have all these layers between you and your money? Do they add value?

More often than not, many of these layers are sold with only the supposed benefits in mind, and with no consideration of the added costs – call it cost-benefit analysis. When you apply cost-benefit analysis more layers always make sense. It figures.

So how do we do things differently?

For starters we do proper cost-benefit analysis for every potential layer between you and your underlying investments. As a result, we’ve generally found that fewer layers are better. For example: Does it make sense for a private investor to work through a local platform to make a global investment? It limits your investment options significantly, it means that you can only access your funds from South Africa, the platform charges an extra fee, and it automatically adds another layer for the global feeder fund. On the ‘upside’, it means you don’t have to go through the minimal admin of moving your funds offshore, and it provides your adviser with a convenience in terms of reporting, switching funds, charging fees, etc. It really makes more sense for the adviser than the client.

At Bellwood, our clients have their own direct offshore accounts. They can login and view detailed statements of exactly what their underlying holdings are, what transactions/trades have occurred, and so on. They can pick up the phone and speak to or send an email directly to the person who manages their portfolio, who can explain our process in detail (which is also part of our client take-on process), the rationale behind specific investments and transactions, etc. Our clients control access to their own funds without restriction. Our clients pay a management fee to Bellwood, and negligible trading costs to the underlying broker. Simple, transparent, flexible and cost-effective.

 Cost-Effectiveness: Do you know what fees you’re actually paying?

 Transparency and cost-effectiveness go hand-in-hand. Where there are more layers between you and your money, you will be paying more fees, and often you won’t know about them beyond the top layer because the underlying fees are simply lumped into the daily unit trust prices. With the platform-feeder fund setup described above, it’s common-place to pay anything between 3% and 5% per year once you add the fees for each layer, whereas a more transparent solution should result in fees of around 1% p.a. for a reasonably sized investment. These differences in fees are not insignificant! The following graph shows what $1m dollars invested in the S&P 500 20 years ago would be worth now depending on the fee being charged:

So how do investors wind up paying such exorbitant fees? Often it’s just that the numbers sound small – “0.5% p.a. here, 1% there, 2% for the fund, oh the platform only takes 0.25%” – so nobody really thinks about the impact that these fees make over long periods of time. Often investors don’t know – their advisor charges 50-100bps and they think that’s it.

Sometimes it’s a deliberate marketing strategy, usually in the area of supposed tax benefits (or deferral). This is a trap that catches so many investors and advisors alike because they don’t do the math properly! The tax numbers are big (often overstated) and applied once-off, or simply deferred more often than not. The costs are usually smaller numbers compounded over time, and because they’re small they’re often only mentioned in the paperwork. The headline numbers make for an easy sale. The reality is that in most cases, any supposed tax benefits are far outweighed by the additional costs involved, and they usually come with the added bonus of complexity, limited investment options and restricted access to your money.

We’re not saying there isn’t a place for these types of products, but that all too often these products are sold to investors that don’t need them.

At Bellwood, we do the math. Most of the time the math says the costs outweigh the benefits. But this is something we can assess properly on a case-by-case basis, with due consideration for other benefits and drawbacks, rather than touting some convenient headline numbers to sell a product.

Alignment of Interests: Make sure you’re not being sold!

“Show me the incentive and I will show you the outcome.” – Charlie Munger

The reason there is so little transparency and so much unnecessary expense is because the investment industry is riddled with conflicts of interest. The grotesque reality is that wealthy investors are a huge cash cow around which an enormous industry has been built to collectively milk it. So how do you guard against this? Understand the incentives of the people you appoint to manage your investments.

Here are three common practices to avoid:

1) Commission-based advice: Trusted advisers are the gatekeepers of their clients’ wealth. This puts them in a potentially lucrative position, especially when they have different ways to earn additional fees. Many advisers make their money through upfront and referral fees. If they were government officials it would be called bribery, but in the investment management industry it is fully disclosed and therefor legal and accepted practice. Many product providers will pay advisers large upfront or ongoing commissions (taken from their clients’ investments no less, and disclosed – it’s all above-board) for bringing clients their way. Others will add a small fee on top of their own fee to pay the adviser for the referral. Is this of ‘advice’ independent? Is it any wonder that advisers are all for selling more products and putting more layers between clients and their money?

2) The broker-manager: Stockbrokers generally make their money from brokerage and management fees. They are often given discretion to manage client portfolios as they see fit, and they charge a management fee for that, but they also make money every time they trade for the account. While all will profess to be honest and most probably are, the reality is that such a perverse incentive naturally makes honest people see more opportunities to trade than would otherwise be the case. More trading means more brokerage, which is more cost to the client, but more money for the broker. The number that gets put on the white board at the end of each day is brokerage generated – that’s the target. Portfolio performance is secondary. This arrangement is not in the best interests of the client.

3) Performance fees: Asset managers often tout performance fees as a way of aligning their interests with their clients’. The reality is very different. Performance fees are first and foremost an additional way to make more money – an added fee. Second, because they are generally asymmetrical (if we win we make way more money, if we lose we still make our normal fees anyway) they create an incentive for asset managers to take greater risks that have potential for huge payoffs, but also greater risk of loss. This creates a conflict of interest, not alignment.


What makes us different?

So how to we deal with these institutionalized conflicts of interest at Bellwood? We only charge a management fee and nothing else. We don’t accept referral fees, commissions, upfront fees, brokerage fees or charge performance fees. If you make more money, we make more money. If you make less money, we make less money. This incentivizes us to look for cost-effective solutions for our clients that maximize their wealth instead of looking for product providers that give us the best ‘rebate’. It also incentivizes us to focus on our investment process and generate real returns for our clients. We also invest substantial portions of our own wealth alongside our clients.

Simple, transparent, cost-effective and as aligned as it is possible to be with our clients’ interests – these principles should form the foundation of any credible responsible investing initiative.

Our clients and regular readers will recognize that we’ve invested a great deal into our investment process. We trust that you will recognize that as highly as we prize our professional capabilities, we esteem the value of our reputation and integrity even more highly.

“Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.” – Warren Buffett