See why financial advisors should favor generalist investment managers over sector-specialist investment managers during periods of uncertainty.
The coronavirus pandemic appears to have reshaped the global investment landscape for the foreseeable future. The new normal may include prolonged bouts of high market volatility. Financial advisors during this uncertainty may be tempted to pick an investment manager which relies on traditional sector specialists to research investments. A “generalist” approach may be the better option. Generalists incorporate a broad spectrum of data across sectors into their decision-making process, enabling them to possibly act more quickly and decisively than a siloed team. In volatile markets where timing is critical, it’s the generalist that may provide an investment edge.
Generalist Investment Managers Can Be More Agile Than Sector Investment Managers
In his book, Range: Why Generalists Triumph in a Specialized World, author David Epstein argues that generalists who learn many interests instead of specializing are more creative problem solvers and better at making connections between abstract concepts than their more specialized peers. Ultimately, Epstein argues, generalists are more innovative, more agile thinkers and better able to see the “big picture” than their specialist counterparts.1
Generalists can have an edge over specialists in environments where individual outcomes are multi-faceted and complex. An emergency room is a good example. In this fast-paced and dynamic environment, a patient’s prognosis can depend on many factors and may be difficult to predict. In this setting an emergency physician with their broad skill set and training across numerous medical disciplines would likely be better able than a highly-specialized trauma surgeon to quickly diagnose and treat the wide range of injuries often encountered in the ER.
Generalists Versus Specialists in Asset Management
Generalist investment researchers view the investment landscape with a wide lens, researching across sectors and geographies. Their 360-degree vision gives them the ability to analyze the many facets of potential investments and then apply that information in determining which investment may offer the most relative value. On the other end of the spectrum are research teams siloed into narrow areas of focus. These teams may have expertise in a specific area (health care, technology, securitized products) but they might miss, or not focus on, information that is outside of their specialty. When describing specialists Epstein notes that “Specialization creates a system of parallel trenches. Everyone digs their own trench deeper, but rarely stands to look over in other peoples’ trenches.” It’s possible that a siloed research team could be blindsided during times of market stress when the dots have to be connected across sectors. Something advisors should consider.
Collaboration Can Facilitate More Responsive Investment Management
Collaboration among team members elevates the effectiveness of a generalist team by bringing together individuals with diverse expertise and backgrounds. Sharing their unique individual perspectives on investment ideas helps form a cohesive 360-degree view. The end result is a more creative decision-making process and a differentiated point of view. Importantly, because a generalist team incorporates such a broad set of data into their analysis, they have the ability to quickly pivot when the perceived opportunity set changes or new potential investment ideas come into view.
Markets are uncertain. A siloed investment research team risks not being able to see or act on attractive investment opportunities. Financial advisors should consider a generalist team approach as an alternative. Their 360-degree vision of the investment landscape and ability to act quickly may provide an edge when timing is critical.
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