‘I did lots of rock and roll and jazz movies’

With data showing that 72 per cent of active managers underperformed their benchmark over five years, it’s impossible not to be a tad cynical when a manager claims that outperforming an index isn’t as much hard work as some would assume.

John Ricciardi, co-founder and chief executive of Kestrel Investment Partners, who ran his first £1bn when he was just 31, claims that he has been following the same process since the 1980s and it’s never failed him. His funds utilise quantitative screening software that Mr Ricciardi pioneered in 2000 when he founded Bullrun Financial, as well as dynamic asset allocation and risk profiling and an analysis of human behaviour.

The system enables investors to monitor the behaviour of a portfolio compared with a benchmark, with access to the factors affecting equity portfolios and managed accounts, as well as dynamic measurement of performance and analysis of how it is achieved.

Mr Ricciardi claims that he looks at these ‘leading indicators’ to work out which direction markets are heading in, before then trying and work out when the change will happen. He adds, that the team look at a seven to 10 year horizon to try and determine what they should hold in the portfolios.

He claims, nevertheless, that qualitative judgment also plays a key part in the process. “It helps to have these quantitative tools, but at the end of the day markets are not just about the numbers, they’re about the psychology, so you need managers to sit there and say, ‘We know what the numbers are going to be, we know topline growth is going to be X, and we can see what the discount rates are going to be’, and then ask themselves what the market reaction to that is going to be.

“You can’t just have the numbers run the money – we feel it’s necessary to have the human to understand the psychology.”

Kestrel sticks to 12 different asset classes, which it rates according to their risks, from cash at the bottom to equities and alternatives at the top. By holding more of the low risk assets, the team target an annual return of 5 per cent, and by upping their allocation to the high risk assets, they hope to achieve a return of 20-25 per cent per year.

“We try not to be like a hedge fund. We barely move it. It’s really quarter to quarter that we make changes,” he says. “This way you have an optimal long-term allocation, that if markets were perfect you’d never move.

“We then react to market movements by sliding up and down the risk scale, to protect portfolios if markets are going to be bad. So, for example, we move from a portfolio that holds lots of low risk assets and only a little bit of high risk, to a central portfolio which is a balance between them and then at certain points we may decide to own mostly high risk assets.