Our concept consists of three layers, the first of which is our ‘ethical credo’ and the second our set of eight core investment beliefs.
The third indicates our realization that we have to give back to the world. We do so by helping clients, partners, and students in emerging and frontier countries. Along with a knowledge transfer to promising ethical entrepreneurs across the globe. This is of course over and above of what we can already achieve through our investments.
At the base of the pyramid our Ethical Credo ensures that we contribute to a world in which FAIR trading, financing, banking and investments become standard instead of remaining something exceptional. On ‘Fund Advisory’ we explain the Parmenion Ethical ‘equation’ (UN-PRI- + Shariah-Compliant = FAIR) in more detail.
Investments – Our 8 Core Beliefs
Parmenion Ethical’s approach to investment is a structured one, directly linked to our Group’s intellectual property and systems. Our investment philosophy is based on 8 core beliefs, with our Group’s Global Tactical Asset Allocation (GTAA) model – developed in close collaboration with Nobel Prize Laureate Dr Markowitz – providing a solid underpinning.
Man – Machine
Although our approach is based on academic theory developed during the last 50-60 years (see the joint article by Markowitz and Parmenion CIO Van Dijk in the Financial Analysts Journal), we do believe that the application in the real world requires the use of both ‘quantitative’ and ‘qualitative’ inputs. Both are about equally-important in our ‘Man-Machine’ approach.
Our approach is not a static one. Markets, countries, legal and political systems, investment theories and other relevant factors are constantly developing and changing. This implies that our system is never ‘ready’, with an on-going research and learning effort being a key element of our Investment Philosophy.
1. Real Diversification
Real diversification is the most effective method to control portfolio volatility. If possible, diversify between countries, sectors and asset classes.
2. Asset Allocation
Asset allocation decisions are responsible for the bulk of investment portfolio returns and risks. Sadly enough, too many people do still spend at least 80% of their time worrying about investment picking with only the remainder available for asset allocation.
3. Real Assets
Real asset classes provide investors a risk premium versus inflation and cash over time. In our approach we want to invest in the underlying real economy and not in financial engineering products.
4. Markets are not efficient
Markets are not ‘efficient’, and Emerging and Frontier Markets are often very inefficient. In other words: structural outperformance is possible, but it is not easy to achieve it. But good managers with local presence and/or expertise are still capable of adding excess return.
5. Emerging and frontier markets are here to stay
Emerging and Frontier Market countries will be important global growth engines during the next 50 years. Our Nicanor Fundamental Index* incorporates this. Compare no. 3 above: invest in trends in the real economy and avoid financial engineering. However: keep in mind the extra risk when investing in emerging and frontier market countries.
6. Local Players add value
Local players will play a growing role in Emerging and Frontier Markets asset management.
Our investment philosophy is based on a solid, academic underpinning. However: ‘quant’ alone will not work. What is required is a Man-Machine system that embraces i) structured/ quantitative, ii) behavioural and iii) fundamental analysis.
8. Academic Network
Financial markets, countries, political and legal systems and other relevant factors do constantly change and develop. This requires a research-driven, dynamic approach. We use our academic network to ensure that the best fundamental research is readily available when we contemplate model improvements or extensions.
(*) NOTE: The proprietary Nicanor Fundamental Index weighs asset classes and/or countries not just on the basis of their market-capitalization weights, but it includes key fundamental economic and financial variables as well.
Our Top-Down Approach
The investment approach within Parmenion Group is an innovative in- / outsourcing system based on our belief that ‘best-of-breed’ investment management solutions are available. These solutions are often provided by others than the big, well-known fund houses. Parmenion research indicates that most big, fund houses have at best 30-35 percent of their investment strategies classified as ‘best-of-breed’.
Niche specialists and local asset managers are in many instances best equipped to add value bottom-up. Of course, there are also underperforming so-called specialists but additional research by Parmenion Group has shown that the best specialists outperform the best generalists by an even wider margin when looking at the universe of Western-style ethical and Shariah-compliant fund managers. Ethical investing is more than just adding an extra layer.
Within the solutions that we offer Parmenion Ethical will coordinate the activities of these managers top-down. Our top-down role will consist of:
- Asset Allocation;
- Overall Portfolio and Risk Management;
- Investment Manager Selection;
- Ongoing ethical screening.
At the moment we have more than 2,000 strategies from approximately 500 asset managers to choose from. This represents approximately 7-10% of the total universe of managers and strategies available in the Parmenion databases.
However, it is a good sign that the percentage of managers and strategies that comply with our ethical credo is rapidly growing. Some 10 years ago less than 1 percent of the universe was investable on the basis of our credo. We believe that the percentage will grow further during the next 5-10 years and expect some 15-20% percent of the total universe of investment solutions to be candidate for investment to Parmenion Ethical.
This is a good development, not just because it indicates a growing desire to invest fairly, but also because a wider choice makes it easier for us to find even better fund managers for you. How that works? Well, normally one out of every ten funds that we analyse classifies as best-of-breed. More choice enables us to find even more extraordinary gem stones.
Parmenion Ethical is independent and not linked to any asset manager. We believe in top managers and active, outperforming solutions. However, we do also know from our research covering 50 years of data that it is not easy to outperform. And it is even less simple to outperform all of the time. We do therefore always incorporate the possibility to add cost-efficient, passive index-like components into our strategies. A so-called ‘red’ and ‘yellow card’ system ensures that disappointing strategies are being replaced.