Origins of SBI
The SBI story began in the Spring of 2003 with a couple of perplexing questions:
- Why is it not enough to manage equity funds using a highly disciplined strategy?
- Why is it that the industry expects the manager to fit into one of the style boxes?
At the time, his view was little different from that of most academics: hiring an active equity manager was the triumph of hope over reality and style boxes were an innocuous way to organize the thousands of equity managers. This was based on a combination of a cursory knowledge of this particular aspect of the industry and the received wisdom of academic colleagues. Dr. Howard’s research interests lay elsewhere in 2003, but they were about to change dramatically.
He began digging into the research behind the boxes and, to his surprise, discovered that there was no research supporting the use of the boxes. He then turned to exploring the possible impact of the boxes on investment performance. Based on his research and that of others, it became obvious that limiting managers to one of the style boxes hurt performance.
This meant that in order to find successful active managers it was necessary to develop an alternative framework for thinking about them. The key insight was that using a manager’s strategy for forming meaningful peer groups meant that managers had the freedom to pursue their best ideas without having to worry about violating industry imposed characteristic constraints. Dr. Howard concluded that the two most important pieces of information regarding an active investment manager are:
- The investment strategy being pursued, and
- How consistently it is being pursued
Indeed, many in the industry find it much more intuitive and natural to examine managers in terms of strategy. Thus, by late 2004 the foundation for what was to become Strategy Based Investing had been conceived.
Next Topic: How many different strategies are investment managers pursuing?