At Guiscard we value doing things differently, often this involves providing the insights and data that many traditional fund managers wouldn’t.
We utilise a “Win-Loss” analysis to evaluate our performance in the context of how often our investment decisions are right and the impact that these decisions have on returns at the portfolio level.
The accuracy of our investing decisions can be captured by the “Hit Rate” metric (highlighted in YELLOW). This measure shows the proportion of our positions that have generated a positive return. Our score of 72.2% indicates that the majority of our stock picks have been. Whilst a high Hit Rate may signal accuracy and consistency, its only part of the story. The Win-Loss ratio (highlighted in GREEN) is by far a much more important way to evaluate performance.
Think of the Win-Loss ratio as investment equivalent of a business’ profit margin. For companies involved in activities like retailing or manufacturing, success is a function of the amount by which revenues exceed costs.
Why treat the business of investing any differently?
As profit is to any other business; the residual value of revenue after costs are taken into account, profit for us is the size of our wins when compared to our losses. Moreover, if we extend this metaphor to risk, cost management is similar to risk management.
Our Win-Loss ratio of 5.4 conveys that on average; our winners have contributed 5.4 times as much profit as our losers have cost us, at the overall-portfolio level. This is what really matters. Whilst a consistently high hit rate provides stable performance, its unlikely to generate exceptional out-performance on its own.
It’s not how often you’re right or wrong that matters, it’s what happens when you’re right and what happens when you’re wrong that matters. A positive asymmetry between profit and loss lies at the heart of every successful investment strategy.
When interpreting our results Win-Loss ratio results it is important to keep in mind that the data we have been able to collect since inception has been limited. For example, we have yet to experience a sustained bear market. We believe that a win loss ratio of 2.1 and a hit rate of 60% are achievable long-term goals.
The bottom two stocks on the loss column (shaded in GREY) were not included in the analysis. These stocks were a part of a corporate action that involved the receipt of new securities following a merger.
Most fund managers are too focused on trying to deliver predictable results, so much so that they miss out on a lot of potential upside. This way of thinking does not align with the inherent nature of financial markets.
Unlike most fund managers, we aren’t constrained by the need to limit our tracking error. Whilst minimising the tracking error does help to mitigate the risk of under-performing the market, the main objective is to manage the fund manager’s risk of being fired for under-performance. Instead, we focus our analysis of risk and return on what really matters to our clients; the size of our win’s. Or, in terms of our previous metaphor, our client’s profit margin on their investment portfolio: revenues (profits on winning positions) minus costs (losses on losing positions).
At the same time, we also manage our client’s true risk – the risk of capital loss. It’s mathematically impossible to lose money if your wins outweigh your losses. This is why we focus on metrics such as the Hit Rate and Win/Loss ratio and ignore other metrics such as tracking error.
In our decision-making process, we understand that such investment decisions must be made on the basis of incomplete information, in an environment where the costs and benefits of our decisions may not be comprehendible for some time.
That’s why we use asset allocation, portfolio construction and risk management strategies together with the high-conviction stock picks selected by a group of exceptional fund managers.