Lessons from the pitch

Craig Brown, Rathbones

Craig Brown, Rathbones

I used to play rugby, free of the fear of hobbling around like an old man afterwards.

My coach from those days may now be considered a bit old school: his language was colourful, his stature rotund and his knowledge of the game almost unrivalled.

He spent many an afternoon yelling at me, and one of these explosions stayed with me: Kiss, or ‘Keep it simple, stupid!’

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He believed that rugby was more straightforward than other coaches would have you believe, and that doing the basic things right was our route to victory.

For a small-town team, we were relatively successful, which I think is proof that his approach worked. 

Reminiscing about my Kiss rugby days, I drew a parallel with investing.

Some managers seem to think they have to create complex strategies to prove their intelligence.

It feels a bit like a salesperson delving into the mind-boggling minutiae of a TV, when all you need to know is that it works, the picture is good and it can be operated without a 300-page manual.

Investors spend years – and a lot of client capital – trying to reinvent new and complex ways to manage money, when perhaps keeping it simple would have been a better option.

This is not to say that investing is easy; there are myriad obstacles in the way of generating sustainable returns and it takes skill and experience to navigate them.

But this can be done in a tried and tested way, and in one that does not leave either retail or professional clients in the dark about how you are doing it.

How can you expect a client to trust you if you cannot explain what you are doing? No smoke and mirrors please.

Like my rugby coach used to say: start with the basics and get them right.

When it comes to investing, that means starting with liquidity and how strongly assets correlate with equities during stressed markets.

Ultimately, that’s all that matters when times get tough and you need diversification to work.

What an asset is called is of no relevance; only the way it behaves. Even within the same asset class, assets can behave differently.

For example, not all bonds are built the same – far from it. Corporate bonds and government bonds will not behave the same way when markets are stressed and we need to factor this into how we allocate capital.

So the question is not whether we invest in corporate bonds at the expense of government bonds. The choice is actually between corporate bonds and equity.

After all, we would expect these two asset classes to be less liquid and correlate with each other more strongly during stressed markets: one should, therefore, not be used to balance the risk of the other.