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!’
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.
How can you expect a client to trust you if you cannot explain what you are doing?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.
Like a rugby team has robust forwards to do the dirty work and speedy (hair-gelled) backs to show the flair, we balance assets which will truly offset each other in stressed markets and provide the necessary diversification.
We believe that doing this allows us to build portfolios which manage risk effectively and efficiently.
However, adding in a few other ideas that are uncorrelated to stocks and bonds, or provide specific protection against certain events, also helps navigate the market’s ups and downs.
Some people use a slightly dodgy rule of thumb here: they look for low-volatility assets with high returns. This conflates ‘low-volatility’ with ‘low-risk’.
Such investments have low volatility only because they are infrequently traded or have theoretical prices. This all boils down to you owning an illiquid asset.
Just like the first summer training sessions back in the day, when a terrifyingly huge new lad would turn up and you would assume he was a killer just from the look of him. It was not until the first game of the season when you realise he was actually a pussy cat.
Similarly, you may find your low volatility investment with the imposing track record falls apart right when you need it.
When it comes to simplicity, it is important to align your goal with that of your investors and help them understand what investing might feel like along the way.
I am yet to meet a client who gets excited about beating a composite benchmark created by a black box risk system.
Most have more straightforward, relevant needs, such as: “Over the long term, I’d like to be wealthier than I am today so I can maintain or improve my standard of living.”
And if this is the client’s aim, then why make the benchmark anything different?
When it comes to risk, we question why you would make the journey opaque or unknowable.
If you are going to try and explain the risk of a portfolio, why start by discussing standard deviation? Most clients could happily live their lives never knowing about it.
Rather than trying to explain jargon to our clients in order to show them how we are doing, we believe it is more helpful to offer them variability of returns as a proportion of the stock market than some abstract percentage.
So if equity markets fall by X per cent, a client’s investment should – all going to plan – fall by 66 per cent of X, 33 per cent of X, or even 100 per cent of X, depending on the risk they take. We want to help our clients get a sense of how their investment may actually behave.
By setting clear expectations and an aligned return target, you keep everything clear and simple.
The old 'Kiss' philosophy of my rugby coach certainly helped us win some games. Hopefully, that same approach (minus the profanities) will help investors too.
Craig Brown is an investment specialist on the Rathbone Multi-Asset Portfolio Funds
