One of the first questions we ask a fund manager: “What is your investment strategy?”
For some, this is a simple question to answer.
For many, it isn’t.
Many wax lyrical about beliefs and values. Others inadvertently combine their investment process and strategy.
This isn’t because people don’t know what their investment strategy is, it’s because the distinction between concepts such as philosophy, strategy and process often becomes blurred.
But they are distinct.
Investment philosophy
This answers the question: What do you believe?
Your investment philosophy is how you see the ‘investment world’. It’s how you think about markets, how you believe they work and act, and how you view investor behaviour.
Think of it as the overarching umbrella that sits above your investment strategy and process. It is a set of beliefs and principles that guide your approach to investing. It is the guardrails that your investment decisions stay within.
Just as philosophers can subscribe to atheism, determinism, or realism, among others, asset managers can share a common investment philosophy. Examples include value, growth and momentum.
Now, you may ask, why is it important to clearly define your investment philosophy?
Well, investors like to know that there is something consistent behind their manager’s investment decisions. This is particularly true when investing in a blind pool of assets.
Investors may be looking for a particular investment philosophy – one that complements other funds in their portfolio. They want to know that their manager truly believes in their philosophy and will stick with it through thick and thin.
Investment strategy
This answers the question: What do you do?
Your investment strategy derives from your investment philosophy. It explains what you do, where you do it and who you do it for. It puts into practice your investment philosophy and lays out how you are going to achieve your goals.
Many managers have multiple investment strategies across different funds. But your investment strategy should always stay true to your investment philosophy and the two should never contradict each other.
Why is it important to clearly define your investment strategy?
Well, investors want to know if your strategy is a fit for their mandate. And they need to know it quickly. This is why it is crucial to understand exactly the type of information investors are looking for when you face the inevitable question: “What is your investment strategy?”
We recommend staying concise and avoiding any confusion by throwing in references to your investment philosophy or investment process.
Investment process
This answers the question: How do you do it?
Your investment process explains, step-by-step, how you execute on your investment strategy. i.e., how you make investments and therefore create your portfolio.
For a typical private equity manager, a high-level investment process might go something like this:
- Market analysis
- Deal sourcing
- Preliminary screening
- Due diligence
- Transaction structuring
- Transaction execution
- Value creation
- Exit
Why is it important to clearly define your investment process?
Well, investors want to know that you have a methodological and consistent approach to making investments. Having and enforcing a disciplined framework shows that you are reliable, professional and organised. Decisions aren’t just made on a whim; there is a process behind them.
These three distinct, but complementary, concepts vary in scale, from an overarching philosophy to a granular approach. Managers that recognise this can tailor conversations with investors, ensuring they are including the right level of detail at the right time. You don’t want to overwhelm someone with lots of detail about your approach to deal selection in your first meeting. Perhaps save that for the third meeting and start by explaining how you see the market.
But remember, it’s important that the entire firm is consistent when describing investment philosophy, strategy, and process. Otherwise, the market receives mixed signals and struggles to identify what truly makes you special.
How are you presenting yourself to potential clients? Are you jumping into the minutiae of your investment process? Are you starting with the how, when you should be focusing on the why? We help fund managers focus on the right clients, the right story, and the right information at the right time.
