Dion Hershan from Yarra Capital Management speaks to James Dunn at The Inside Network’s Equities & Growth Symposium in Melbourne, VIC on looking beyond the old favourites and backing Australia’s future. The Inside Adviser
Marcus Guzzardi from Cooper Investors speaks to James Dunn at The Inside Network’s Equities & Growth Symposium in Melbourne, VIC on conviction and quality: What drives selection in global smaller companies. The Inside Adviser
Luck, skill, and the case for spread-based investing
Selby-Smith’s key argument was deceptively simple but richly layered: the investment industry often places too much weight on performance attribution and not enough on uncertainty, behavioural bias, and structural diversification. By embracing “spread-based” strategies such as the volatility risk premium, advisers can better serve clients in a world where certainty is elusive, and “skill” may be indistinguishable from luck.
Selby-Smith opened by questioning one of the industry’s most cherished distinctions — luck versus skill. Even when following a rigorous investment process, a portfolio’s outcomes may be influenced by forces beyond control. Drawing on examples of randomised portfolios producing wide-ranging results, he highlighted how randomness alone can mimic skill, deceiving even the most experienced analysts. “We don’t know,” he said plainly. “And most of the time, neither do you.” The humility in that admission formed the bedrock of his thesis: if certainty is elusive, then robustness must come from process and diversification, not from attempts to divine the future.
The industry’s reliance on traditional risk metrics and performance reporting came under further scrutiny. “You don’t care about time-series returns,” he told advisers. “You only care about what happened when your clients’ money was actually in the strategy.” This distinction — between statistical performance and lived investor experience — was powerfully illustrated by fund flows data showing wide divergence between fund returns and client outcomes. It’s a sobering reminder that behavioural finance isn’t theoretical — it’s personal and present in every adviser-client interaction.
A major theme of Selby-Smith’s thesis was the volatility risk premium (VRP) — the persistent difference between implied and realised volatility in equity markets. He argued that this spread remains unusually high and under-exploited, even while other risk premiums have compressed under the weight of decades of quant-driven arbitrage. Why? Because VRP is rooted in human behaviour.
“There’s a moral core to dealing with uncertainty,” he explained. “We’re just not very good at it.” From hedging equity downside to buying travel insurance for peace of mind, we consistently overpay for certainty, and the VRP allows those willing to take the other side to be compensated handsomely.
What makes the VRP particularly attractive now is its persistence and resilience. Despite the rise of AI and systemic trading models, the behavioural biases underpinning this premium haven’t been arbitraged away. Investors are still willing to pay for downside protection, especially in a market increasingly concentrated and uncertain. “People overpay to avoid pain,” Selby-Smith said. “And they always will.”
Critically, Selby-Smith contended that the VRP is not just a technical tool but a philosophical reorientation. Rather than betting on singular predictions or stock-picking heroics, VRP strategies allow advisers to engage with markets in terms of probability and payoff — a framework he characterised as more aligned with reality and more forgiving of error. “You’re not betting on knowing the unknowable,” he said. “You’re underwriting risk. And underwriting is about process, not prediction.”
To that end, Selby-Smith drew a sharp contrast between equity strategies focused on time-series returns and those offering “spread-based” returns. The former, he argued, implicitly require advisers to make judgments about manager skill — judgments that are, by his reckoning, often flawed. “The proposition that you can reliably pick skill over luck is a heroic one,” he said. Spread-based products, by contrast, offer something simpler and more robust: asymmetric payoffs rooted in systemic behavioural patterns.
There was also a pragmatic undertone to his argument. He acknowledged that no strategy is foolproof, and poor underwriting of VRP exposure — particularly in crisis moments — can lead to catastrophic outcomes. He invoked the collapse of AIG in 2008 as a cautionary tale, contrasting it with the prudence of insurers like Chubb that survived the same market stress. “Precision and care are non-negotiable,” he said. “You have to choose what you insure against wisely.”
Selby-Smith’s final call to action was delivered with calm urgency. “Diversification is the only free lunch,” he reminded the audience, citing Markowitz. Yet today’s portfolios are less diversified than ever, heavily skewed toward a single market and vulnerable to interest rate misjudgements. With spreads — such as VRP — still wide and uncorrelated, they offer one of the few remaining avenues for true portfolio diversification. “If you believe in process over prediction, you should believe in spreads over stories,” he concluded.
