Investing like Roger Federer
09 July 2024
Roger Federer, Hit Ratio, and Momentum Asset Managements' Approach to Investment Management
Key Points Summary
- Momentum Asset Management prioritises consistent decision-making over chasing trends. They believe a bottom-up approach, focusing on individual stocks with strong fundamentals, leads to steadier success than top-down approaches that rely on macroeconomic predictions.
- The article introduces a case study of a macro-driven equity manager. While this approach isn't their usual focus, Momentum Asset Management was impressed by the manager's structured process, experienced team, and data suggesting their skill in generating alpha through macro analysis
- To assess the manager's capability, Momentum Asset Management employs a "hit ratio" analysis. Similar to a win percentage, it measures how often the manager's allocation decisions (across countries, sectors, styles, and even stocks) are successful. A statistically significant hit ratio above 50% would be a positive indicator.
- Beyond the hit ratio, Momentum Asset Management considers the "breadth" of the manager's decisions. They analyze data covering many years and various asset classes to ensure a statistically significant sample size and assess the manager's consistency in making successful allocation decisions.
Roger Federer, a tennis legend with over 20 Grand Slam titles and countless victories, might surprise you with a stat: he only won about 53% of the individual points he played throughout his career. That might seem low, but it highlights a key principle for Momentum Asset Management: consistency is king.
Just like in tennis, successful investing is about making good decisions repeatedly, not just hitting occasional aces or backhands down the line. That's why Momentum Asset Management focus on identifying managers with a clear philosophy and a process built to find stocks that outperform regardless of the economic climate. Momentum Asset Management call themselves evidence-driven investors, and their experience tells us this bottom-up approach leads to steadier success than chasing trends.
Last week, Momentum Asset Management came across an equity manager who takes a different approach, using macroeconomic and thematic factors to guide their decisions. While this "top-down" approach isn't the typical focus of Momentum Asset Management, they impressed with their structured process, experienced team, and data suggesting their skill in generating alpha (Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market's movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment's alpha.)through macro analysis.
Putting the Theory to the Test: Hit Ratio and Beyond
Momentum Asset Management are always challenging their assumptions, and this time, they dug deeper. They wanted to understand if this manager's success was due to luck or genuine skill, and whether their macro-driven strategy was truly replicable. The Momentum Asset Management team gathered all the data needed and applied a scientific approach to its analysis.
Here's where the "hit ratio" comes in. Similar to Federer's win percentage, it measures how often the manager's allocation decisions (country, sector, style, and even stock selection) were successful. Momentum Asset Management tested the direction (overweight or underweight) and magnitude (size of the deviation) of their decisions, assuming each decision was made monthly.
For a macro-driven manager, the hypothesis is that their skill lies in these allocation decisions. A threshold was set - a hit ratio significantly higher than 50% -- to determine if their success was statistically sound. After all, if Federer could achieve so much with a 53% win rate, a strong hit ratio would be a good sign for this manager.
Breadth Matters: Why There Is Confidence
But there's more to the story. Federer's dominance wasn't just about winning points; it was about consistently winning them over a long period. Similarly, the "breadth" of a manager's decisions matters. Momentum Asset Management have a large dataset covering many years and various asset classes, ensuring a statistically significant sample to assess the manager's consistency.
The results of this research will be available in the upcoming factsheets and commentaries. If the hit ratio holds up and the manager demonstrates consistent skill, it is possible there will be a new addition to the Momentum Asset Management investment lineup.