Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday, 13 June 2017

What you are missing out that the institutional investors are doing

19:37 Posted by szcszc 1 comment

As retail investors, we often perceive ourselves or by others as inferior investors that are incapable of obtaining superior returns as compared to institutional investors. This is partly due to the pre-conception that institutional investors are more sophisticated and knowledgeable where they can utilise complicated strategies with confusing instruments. However, with more and more articles that emphasized the ineffectiveness of active institutional funds and how passive funds are outperforming active funds, you may be swayed towards believing that active funds are lacking.

So how do we, retail investors who want to take on a more active investment approach, do to outperform the market benchmarks? 

Given their long establishment and experiences, active institutional funds do have established processes and frameworks that retail investors can exploit to improve their chances. 

1. Efficient employment of capital

Institutional investors often have large amount of capital. To maximise returns, it is also prudent to manage and ensure that a comfortable level of capital is employed for the purpose of earning returns. Evaluation of options to determine returns so as to effectively utilise capital is also important. Depending on choice of asset classes, level of capital usage also varies. From personal experience, in trading forex, 60-70% of capital should be employed consistently to ensure efficient use of capital to generate returns. Comparing to other asset classes like equities, this may be low but given the high leverage nature and buffer for margin calls, this would be sufficient. 

Just based on simple logic, by having most of your capital consistently employed and utilised to earn returns ensures a higher chance of out-performance.

2. Recording your investment thesis and reviewing when necessary

Institutional investors often record their investment thesis when they invest. This is important for the management and continuity of the investment strategy where new employees can easily understand and takeover an existing portfolio based on various reasons for investment. Another important step is to review the investment only if there are material changes in the investment scenario or market. Unlike retail investors, they are less likely to be impacted by daily price movements, which are erratic and random. This could be also possible due to the bureaucracy layered in an organization where it takes slightly longer than individuals to evaluate and make decisions. This is then one advantage of retail investors where we are more nimble and sensitive to capture investment opportunities. This means that we are able to get in at favourable prices. The tough part is, hence, to differentiate from the noises of the market (daily price fluctuations) and sticking to your investment plan.

From personal experience, all these noises are often the ones that distract me from the ultimate underlying price that I have for a specific investment. The market will often try hard to force you to move your positions and fake you out before moving exactly in the way you predicted. Thus, it is important to be able to differentiate what change is material enough for a change in investment stance.

3. Having co-investment officer
We could see that there are multiple successful funds that have 2 leaders to dictate investment strategies. Examples are PIMCO, KKR. Contrasting this to traditional leadership models where one individual will make the overall decision for direction. From personal experience, by having another investor that understands the overall investing strategy, it helps to keep one another in check for emotions such as greed and fear, as well as to promote accountability in managing other's funds, there are more detailed thought process in both investors before committing to a decision. Discussions are also conducted to discuss future strategies and evaluate investment options. 
Beside these techniques, what are the other ways you try to increase your investment returns? Share it here!


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1 comment:

  1. Thanks for sharing this thought on how institutional investors are smarter in investment decisions. Post is very informative. Thanks a lot...Check Ordering

    ReplyDelete