Choice Words: Jordan Sriharan, senior fund manager at Keyridge AM

“Whereas, to find the red flags, you have to get underneath the quantitative data and really understand, What is the drawdown risk you are expecting to generate in that particular asset? And, connected to that, Do you understand the correlation of that particular investment to the rest of your portfolio?

“Now, that can shift over time – I am not suggesting correlation remains the same over one, two, three years – but if you can be comfortable with the maximum drawdown, given its place in the portfolio, then that, for me, is the ‘red flag moment’. And if it is a number we think is too high for an asset, in either the growth or the defensive bucket, then that is a signal it perhaps doesn’t sit neatly where we want it to from a portfolio construction perspective.”

Economic resilience

On the question of what excites him about the outlook for markets, Sriharan makes an interesting case for his answer – the resilience of the global economy. “If I think back to my economics degree, 20 years ago, and what it taught me about the interaction between interest rates, the global economy and inflation – I am not cynical about it but I do wonder how much of it holds true today,” he says.

“What we are seeing today is a world that has slightly decoupled from that. Yes, you can look at the short-term noise around, say, credit-card spending – or particularly after the events we have had with the Iran conflict in early March – and you can get behaviourally biased into shorter-term thinking. I get the sense, however, that economists are perennially pessimistic about economic growth rates – with respect to GDP and, particularly, developed markets.

“I don’t think we have an accurate way of measuring productivity in the global economy, though, and so when we look at the pessimism of economists and we look at the economic reality – at least for corporates and their earnings profile – it strikes me the global economy is much more resilient than we typically have understood it to be in the past.”

As for what worries him about markets, Sriharan highlights short-term pricing movements in different asset classes and subsectors. “Today, for example, I would not say software is dead in a ditch but, at the same time, I don’t think semiconductors is the only sector in town we can play,” he continues. “So this is more of a structural idea rather than being worried about one individual issue at any point in time.

“Of course, pricing movements are a reflection of markets’ best thinking – I am not arguing against that. I just think you can be very quickly buffeted by short-term movements and asset prices – both up and down. So I worry about how engaged I can become as a result of those price movements – and what I am always trying to think about is, How do I avoid being behaviourally biased in my views on markets?”

Transcript of Choice Words Episode 34:

Jordan Sriharan, with Julian Marr

JM: Well, hello and a very warm welcome to another in our series of ‘Choice Words’ videos, where we get to speak to the great and the good of UK fund selection and UK fund research and find out what makes them tick. I am Julian Marr, editorial director of Wealthwise Media, and today I am delighted to be talking to Jordan Sriharan, who is a senior fund manager at Keyridge Asset Management. Hello, Jordan.

JS: Hi Julian. Thank you very much for having me today.

JM: My absolute pleasure. Let’s jump straight into my first question – and it could be a long answer! What excites you about the current investment outlook? And what gives you pause for thought?

JS: What excites me? I mean, it is an exciting industry – so tough to know where to start! What I would say is, when I think about today’s global environment, we are much more comfortable with the resilience of the global economy. If I think back to my economics degree, 20 years ago, and what it taught me about the interaction between interest rates, the global economy and inflation – I am not cynical about it but I wonder how much of it holds true today.

And what we are seeing today is a world that has slightly decoupled from that – and I think that demonstrates there is resilience. You can look at the short-term noise around, say, credit-card spending – or particularly after the events we have had with the Iran conflict in early March – and you can get behaviourally biased into shorter-term thinking. But when we look at the results and we look at the economic output, actually the global economy is much more resilient than we give it credit for.

So when I think about things we learn from history, I get the sense economists are perennially pessimistic about economic growth rates – with respect to GDP and, particularly, developed markets – but I don’t think we have an accurate way of measuring productivity in the global economy. And, when we look at the pessimism of economists and we look at the economic reality – at least for corporates and their earnings profile – it strikes me the global economy is much more resilient than we typically have understood it to be in the past.

And then you asked me about what worries me – and I am always worried about short-term pricing movements in different asset classes and different subsectors of asset classes. Today, for example, I don’t think software is dead in a ditch but, at the same time, I don’t think semiconductors is the only sector in town we can play. And what I am always trying to think about is, How do I avoid being behaviourally biased in my views on markets?

That is a constant ‘push and pull’ I think about when it comes to worries. It is more of a structural idea rather than being worried about one individual issue at any point in time. And pricing movements are a reflection of markets’ best thinking – I am not arguing against that. I just think you can be very quickly buffeted by short-term movements and asset prices – both up and down – and I worry about how engaged I am, or how behaviourally biased I can become as a result of those price movements.

JM: That is a good start – both keeping a check on your behaviour biases and also being generally upbeat and ‘Don’t worry – it is going to be slightly better than you think it is’! That is a nice approach to life. 

Catching the drift

JM: I am going to ask a separate question – or a separate related question – on style drift, then. How do you guard against it, whether that be personally or in the assets you buy?

JS: Style drift is a fascinating question because, if I think about the Fundsmiths and Lindell Trains of this world – and the amount of noise they have created in financial news over the past six, 12, 18 months – they wonderfully represent funds that have stuck to their knitting and not ventured outside it. And yet they have been critiqued for their total-return qualities over, you know, four or five years and indeed over longer periods.

And I guess I have become a bit – what’s the right word? – disengaged, perhaps, with that reporting because it doesn’t reflect on what those managers’ underlying styles are. It kind of copies-and-pastes them into a total return approach – that, if they haven’t outperformed XYZ over five years, then they don’t warrant inclusion. Yet, if you talk to heads of fund research, they will tell you they are doing a certain job in the portfolio.

And that comes back to the point about the type of product you are buying. In the global equity space, style bias is a real thing – and people have bought or purchased because they have a growth bias or a value bias and they sit within those neat ‘buckets’ within their asset allocation process. And those individuals, those funds, cannot afford style drift – it is the nature of what they are trying to do and they typically have processes that lend themselves well to that type of stylistic investing.

Where there is flexibility, I think – at least in the equity space – is with small and midcap active managers,. Typically, they are a smaller allocation of your portfolio and I think people are willing to allow some pragmatism to creep into that mindset.

So you could be, say, a UK midcap growth manager but if, in reality, it is the cyclicals and value names that have been on a run for one, two, going on to three years, I think pragmatism allows you to lean in a bit to that cyclicality in your portfolio – because you are a small position, you are a small part of the portfolio and you are always judged against the benchmark.

And so, if you have moved into that space a bit in order to ensure your tracking error, shall we call it, has not moved too much, I have some sympathy with that. So I am comfortable with style drift when it comes to those types of ideas or ideologies – but when it comes to your big positions in global equity and you are buying a fund because it has a particular style bias, you cannot really tolerate any style drift ultimately.

‘Real world’ thinking

JM: Thank you for that. A more personal question now – what was your path into investment and, in an alternative universe, what do you think you would be doing now, if you had not taken it?

JS: I probably had quite a traditional route into investment – which is a really boring thing to say – as somebody who did economics at both an undergraduate and postgraduate level! That was all born out of my A-levels, really, as economics was one subject that piqued my interest. That is not to say maths and English are not interesting but there is something more ‘real world’ about economics than those two particular A-levels.

So I took that on with me and it just made sense to follow that in tertiary education and then naturally into investment. Although, as I said earlier, I am not entirely sure what I learned 20 years ago marries up with what we are seeing today, given how much change there has been in the natural infrastructure of global economies.

As for what I would be doing if I were doing something different, my parents were very much from the school of, In the summer holidays you get a job – and so I think, in my late teenage years, I would have worked as an accounts assistant or a junior accountant or in an administrator-type role in the summer holidays, and I would probably have piggybacked off that post-degree.

And, I mean, that is incredibly boring – and that is no offence to accountants as there are obviously lots of interesting things within that sphere – but I fear I might have ended up in that kind of a world. Had you asked me this when I was a young teenager, though, I would have probably told you I was destined for sporting fame – with misplaced faith, I would add! So depending on what age you asked me that question, I would have given you a different answer.

JM: No, no – it’s important to dream. It is just important not to dream of becoming an accountant – I suspect that is a red flag!

Pragmatism in multi-asset

JM: Yes. I also like somebody who is prepared to say, I don’t just have one ‘biggest mistake’ – I have different categories of them! That is a humble way of looking at life! Let’s stick with personal questions then – what kind of investor would you say you were?

JS: I would say I was pragmatic, ultimately – I think dogmatism does not work, particularly in multi-asset. When you are a US growth equity fund manager, dogmatism makes perfect sense – you live and die by that – but when you are in multi-asset … multi-asset today is multi-faceted. You have no excuse not to generate returns as there is a myriad of aspects. It is not just equities and bonds or alternatives – as we have already spoken about – it is also, you know, what of your FX have you hedged? What is your duration position?

So for a multi-asset investor, there are lots of tools in the box we can use. And so being pragmatic is an important part of flexing that opportunity set – because the cycle can go through periods of being very short and you can go through periods where some asset classes just grind on higher. And so pragmatism, to me, is a strength rather than a weakness.

I think that is where good multi-asset managers do well – and, you know, I would reference my previous story on not changing my mind on tech for three quarters. But, actually, that was a decade ago and I think you have to be aware of how events change, and as a result, end-outcomes change. Not to quote Winston Churchill but, as the facts change, I change my mind – and I think that is quite pertinent in multi-asset investing.

So being pragmatic and, then, being thoughtful. That might seem an obvious thing to say, but the thoughtfulness has to come from your portfolio construction over time. Just layering on risk, without thinking about how everything is correlated, ultimately ends up with periods of strong performance followed by a risk-off moment – and you give all your alpha back.

Clients want a certain investment journey, I believe. Some want to shoot the lights out – and that is fine; and some want to be ‘steady Eddies’. But I think the majority of us sit in the middle lane of providing a smooth investment return profile for clients and, in order to do that, being pragmatic and being nimble and being thoughtful about your portfolio construction are three qualities I like to think I have.

JM: Good answer. I have not done that question before but I think we might have to go with it again. You have set the standard for that – so thank you. 

The fork in the road

JM: That is a nice answer – well played. We are racing through here – only a couple more questions to go. First, what advice would you have given yourself on your first day at work?

JS: What advice would I have given myself? I would have told myself to keep my head down – not that I didn’t. But there are a certain amount of questions you should be asking and too many questions on your first day – outside of, Where’s the cafeteria? – can probably do you more damage than good.

What I would also have told myself on day one is just be prepared to work as hard as you need to for those first … I don’t know what the time period is – certainly the first five years and, I guess, longer in reality. And what happened is, I did the CFA very early on, as you could – and maybe if I had not left early to revise and stayed later to get critical work done, then maybe I would have seen a difference in the ‘fork in the road’, once I qualified with my CFA.

That is not a negative – I guess I got my qualification and I got out, as they say – but I would have told myself, you know, applying yourself time-wise and mentally is a much better decision than choosing to kind of divide your time up between personal conquests, such as CFA exams, and being in the office.

JM: Interesting. I am completely with you on questions. That idea there is no such thing as a stupid question? Well, I am not willing to take the chance sometimes – except maybe half the ones I ask here, of course!