13 months ago

Blue Chip Issue 82

  • Text
  • Financial
  • Advisors
  • Investments
  • Equity
  • Wealth
  • Offshore
  • Asset
  • Portfolio
  • Investing
  • Global
  • Momentum
Welcome to our Investing Offshore Special Edition of Blue Chip. a quarterly journal for the financial planning industry and the official publication of the Financial Planning Institute of Southern Africa NPC (FPI). Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.


FINANCIAL PLANNING The End of Average The title of this piece is analogous to the title of a book authored by Todd Rose. Fascinating book, highly recommended. The book starts off with a unique story. The United States Air Force had a rather peculiar problem in the late 1940s. Their pilots struggled to control their planes, which was mind-blowing since this was the age of jet-power aviation with planes being more sophisticated than they had ever been. A retired airman remarked to Rose, “You never knew if you were going to end up in the dirt.” At the peak of this mystery, 17 pilots crashed in one day. The first point of blame went to “pilot error” as being the most common reason for the crashes. Reasonable, as the planes seldom malfunctioned. This was confirmed by the engineers. Think of it in today’s terms – it is often not a computer or hardware problem, but rather a “person in front of the computer” problem. The pilots were baffled as well. The only thing they were certain of was that their piloting skills were not the cause of the problem. This serious issue led to multiple enquiries, all ending with no answer, until attention was directed to the cockpit of the planes. The first-ever cockpit was designed in 1926. Engineers measured physical dimensions of hundreds of male pilots. The data was used to standardise the dimensions of the cockpit. As Rose notes, female pilots in those days were “never a serious consideration”. For the next three decades, the size and shape of the seat, the distance to the pedals and stick, the height of the windshield, even the shape of the flight helmets were built to conform to the average dimensions of a 1926 (male) pilot. Engineers wondered if male pilots had increased in size since 1926. And so, in 1950, researchers at the Wright Air Force Base in Ohio started to measure more than 4 000 pilots on no less than 140 dimensions of size that included distance from a pilot’s eye to their ear, thumb length, size and crotch height, and then calculated the average for each of the dimensions. Rose observed, “Everyone believed this improved calculation of the average pilot would lead to a betterfitting cockpit and reduce the number of crashes. Or almost everyone.” Everyone except Lieutenant Gilbert S Daniels – the newly hired 23-year-old scientist straight out of college to the Wright Air Force Base was sceptical. His job was to measure pilots’ limbs with a tape measure. Daniels, a Harvard graduate, had majored in physical anthropology, a field that specialised in the anatomy of humans. Daniels did a study on the shape of human hands during his undergraduate thesis and discovered that even for students with There is no such thing as the average person. the same ethnic and sociocultural backgrounds, their hands were not similar at all. Daniels told Rose, “When I left Harvard, it was clear to me that if you wanted to design something for an individual human being, the average was completely useless.” So, when Daniels was assigned to measuring pilots, he kept asking himself, “How many pilots really are average?” He decided to find out. Using data from 4 603 measured pilots, he calculated the average of the 10 physical dimensions believed to be the most relevant for design. Daniels determined the dimensions of the “average pilot”, which he defined as someone whose 66

FINANCIAL PLANNING pilot” did not exist. Even more interesting, if you picked only three of the dimensions, less than 3.5% of pilots would be average size in all dimensions. The conclusion was that if a cockpit was designed to fit the average pilot, it was designed to fit no-one. In a 1952 air force technical note entitled The Average Man? Daniels made the radical recommendation that environments need to fit the individual rather than the average. The air force listened. And as Daniels explained to Rose, “Once we showed them the average pilot was a useless concept, they So, will the US still be the largest economy over the next were few able to I focus believe on the fitting answer the cockpit is yes. to the individual pilot. decades? Will China take their crown? Will Europe or Japan wake That up is when A things unit trust started portfolio getting has better.” the obligation to provide liquidity t The air force centred on a new guiding principle: individual fit. again? And will their respective markets follow? No-one knows, even holders whenever required. If I want to withdraw my funds, I p Rather than fitting the individual to the system, the military began though many has an opinion. Either way, buy a low-cost index fitting that the redemption system to the request individual. and Cockpits have access were to re-modelled my funds to a few days la references the major stock markets and economies of the world. fit An pilots most whose cases). measurements Hence, management fell within the of 5% these to 95% funds range needs to be example, the Vanguard Total World Index with a fee of only 0.08% on per each dimension. in such a way that liquidity is readily available. An individual o annum. Buy and hold for as long as possible. Aeronautical other hand engineers has, quickly with the came right up financial with solutions. coach, One the of ability to ta The overall asset allocation and in particular the allocation them included illiquid adjustable positions. seats, now standard in all automobiles. Rose concludes the story: “Once these and other design to bonds is a bit trickier. The average US 10-year bond yield in Structured notes that are designed to provide a high proba solutions were put in place, pilot performance soared, and the 1980 was 11.43%, versus the average yield in 2020 of 0.89%. of coupon payments (quarterly, semi-annual or annual US Air Force became the most dominant air force on the planet.” Remember if yields decrease, bond prices increase, so this was The question provide then some beckons, downside if Daniels protection could can not be find a great one alternat a phenomenal bond bull market. Could rates go lower still? “average traditional airman” out bonds. of 4 603 Individuals pilots and could have only the option classify to 3.5% take advanta Possibly. Are rates going to go consistently lower for the next as an average the illiquidity when three premium of the 10 that dimensions most retail were portfolio considered, managers ca few decades? Probably not. how can we Constructing possibly have a standard the investment solution for The allocation to bonds and bond alternatives versus equity each client? core of any strategy is Every person is unique. Each person depend on two aspects that are intertwined. Firstly, your investment literally the centre of has a unique situation they are currently period and secondly, your ability to stomach volatility. The longer in that includes the investment a unique process. background, your time horizon, the lower your allocation to bonds should and be a unique The attitude next steps towards are money the and and the lower your volatility absorption threshold, the higher your finance, saving satellites and that spending. can provide There is no allocation measurements to bonds were should within the be. middle A quality 30% financial of the range advisor of values should such be thing exposure as the average to some person. totally able for each to assist dimension. here with ease. Wealth unique managers assets. and Think financial For example, the data showed that the average height of a planners should take this to heart. “One There are alternatives to traditional sovereign bonds in highyield corporate bonds. Although the probability of default is economy, innovation and infrastructure, the green pilot was five foot nine. Daniels then defined the height of an size fits all” is just not good enough. “average pilot” from between five foot seven to five eleven. We need to treat every client as the higher From here, than Daniels their sovereign compared each counterparts, pilot to the “average so too is pilot” the expected to unique individual disruption that and they health are. and Design return. determine If, however, what percentage offshore pilots bonds would are be not within expected the average to provide a unique wellness strategy for to name them and a few. through an range inflation-beating the 10 dimensions. return in the medium to perhaps even the process With build the trust, right which advice, is the long Consensus term, are was there that other vast tools majority a private would investor fall within can access foundation you of can every build great something relationship. that range. provide The outcome? some sort Zero. of downside protection with a higher Clients truly deserve special a and state-of-the-art unique Hannes Hannes Viljoen, CFA, CFP®, CEO Rose attested, “Out of 4 603 pilots, not a single airman fit fighter jet service, with an adjustable CFP®, CEO and Head of probability than bonds to deliver inflation-beating returns? to your personality. Head of Investments, Kudala We within the average range on all 10 dimensions.” The “average cockpit to suit their unique composition. Investments, Kudala Wealth 67 3

Other recent publications by Global Africa Network: