As a fund manager, I am often asked what really drives the selection of stocks in a portfolio. Many expect a dry analysis based on numbers, models, and financial forecasts.
But a portfolio is more than its key figures. It is an expression of a worldview, a vision of the future, and a reflection of the composer. It is as much art as it is science.
The portfolio is a painting. The manager’s painting.
Think of Albrecht Dürer’s famous watercolor, “Young Hare,” for example. With its richness of detail, layers of brushstrokes, and precision, it is almost photographic in its execution.
Each stock can be likened to such a brushstroke – a careful choice based on deep analysis and an understanding of the market’s color palette. The constituent companies are turned inside out, meticulously documented to the sixth decimal.
On the other hand, we have Rembrandt’s charcoal drawing of an elephant. Simple, raw, and brilliantly honest. A few lines, a contour, some shadows from the charcoal, and yet we see an animal so alive that we can almost see her breathe.
Another type of portfolio can be created with that philosophy: few, powerful, and clear choices that together create a perfect whole. It is the bold move of a manager who trusts their instincts and intuition, their pattern recognition.
Dürer’s watercolor and Rembrandt’s charcoal drawing are both fantastic works of art, but the fascination one feels is radically different towards them.
Two investors with the same palette and canvas – the same market data and mandate – can create completely different portfolios. For one, more data is the raw material to paint as realistic a picture as possible; for the other, it is about the greatness of expressing the essential with as few strokes as possible.
What makes a portfolio more than just a collection of assets is therefore who the manager is.
Each choice is colored by the insights and experiences that the manager brings: knowledge of industry dynamics, a belief in technological advances, an understanding of human behaviors, and respect for the planet’s limitations. The result is a vision of the future expressed in holdings and allocation decisions.
Equally subjective as unscientific, regardless of method.
The problem with the analogy arises when what one is trying to depict, or interpret, is a changing reality. Even though a hare is dynamic too, it eats, sleeps, reproduces, and dies, the artist’s task is to capture a moment. An economy is far from an exact science.
Companies also go through life cycles with growth, breakthroughs, acquisitions, spin-offs, and bankruptcies. And all this in a changing environment influenced by thousands of factors that are in turn interpreted and acted upon by millions of independent actors.
Many argue that economics is not a science at all, but rather a method of explaining things after they have happened. For example, macroeconomists and strategists have predicted about 27 of the last three recessions. It is easy to drown in up-to-the-minute details to get the perfect whisker on the hare, or – in a metaphorical sense – hedge exactly all factor exposures.
My thesis is that it is better to be generally right than precisely wrong. So I paint my own picture: diversified and with lower risk than many others, but if I am right a little more often than wrong, it becomes acceptable. The humility that comes from repeatedly, over two decades in the stock market, being categorically wrong, affects the structure of the portfolio’s exposures.
As the artist in their studio must ask themselves: what image do I want my portfolio to convey? And is it an image that can stand the test of time? A portfolio is not just a mirror of the market – it is a mirror of who we are.
This may sound a bit lofty, but so be it.
The crucial difference between art and portfolio composition, however, is that the beauty for the latter hardly lies in the eye of the beholder. A manager’s work is judged exclusively quantitatively.
You can have never so beautiful companies in the portfolio, but if it does not generate competitive returns, your work is in vain. That’s why periods of poor performance are so difficult. One is forced to realize that the reflection of one’s work is a collection of blurry footprints in gray watercolor.
Pontus Dackmo
Manager and CEO at Protean Funds