Harin de Silva on Portfolio Management (Podcast)

Fundamental Law

The fundamental law of active management is a cornerstone in understanding investment success. Harindra de Silva explains that this formula connects success to three key factors: breadth, forecasting ability, and information transfer. Breadth refers to the size of the investment universe, forecasting is measured by the correlation between predictions and outcomes, and information transfer evaluates how well information is integrated into the portfolio 1.

The three decisions that are the three inputs to determining your success is, one is how big is the universe? What's the breadth of your investment decisions?

--- Harindra de Silva

These elements collectively determine the potential outperformance of a portfolio, a concept developed by de Silva and his colleagues in the 1990s 1.

   

Low Volatility

Low volatility strategies aim to manage funds with reduced market volatility while maintaining similar returns. Harindra de Silva describes a strategy with a portfolio beta of around 0.6-0.7, focusing on factors like price-to-sales and asset turnover, which are currently rewarded in the market 2.

The idea is to have a volatility of about 70% of the equity market and a similar return.

--- Harindra de Silva

Additionally, call writing strategies are employed, using index calls to mitigate the risk of stocks being called away, and focusing on mispricing opportunities in longer-dated calls 3.