I’ve been involved in identifying, assessing, hiring, developing and managing talented investment managers for most of my career. In 2004, I worked on an initiative, at my then employer, with some organisational psychologists to uncover ‘What are the common traits of the best fund managers?’. A decade later, my current project and the article in this week’s FTfm have brought the question of ‘what makes a really good fund manager’ and ‘is it really possible to identify them through manager research’ back to the surface of my attention. More broadly, I am fascinated by talent, excellence and what conditions help foster a high performance team. I would love to hear your thoughts, experiences and observations on this subject.
Are manager recommendations from investment consultants really “worthless”?
I realised early on in my career that the traditional manager research process, as it is most commonly executed, was flawed. So, I have some sympathy with Steve Johnson who writes in this week’s FTfm that “The funds recommended by consultants do no better than any other, and by some measures they underperform the wider market significantly”. He is referring to recent research, conducted on US equity funds, published by Oxford university’s Said Business School. I think he takes it too far in labelling all manager research, done by all consultants, across all asset classes as “worthless”. I don’t agree. I have worked with (and been interrogated by) some great manager researchers, as well as some awful ones, and there are asset classes, strategies and market environments in which good research is invaluable.
It is true that many manager researchers go through the same tick-box exercise of screening out poor past performance, small assets-under-management, new teams, high turnover, etc. It’s easy to ignore funds that don’t neatly fit into a box, in favour of factors that are more easily observed such as business profitability, coherent philosophy, consistent process, risk control, client service and past performance. I can understand why many firms do it this way (it’s easier, more scalable and lower risk), but rigid templates, tick-boxes, rigorous screens and committee decision making kills the best investment ideas for manager researchers (just as it does for fund managers).
Unfortunately, even when consultants conduct face-to-face meetings with fund managers they are not always effective. Fund managers are hugely incentivised to say the right thing and to avoid saying anything that might cause concern. The rewards for getting it right are massive and the cost of getting it wrong is bigger. Fund managers get coached, briefed and trained ahead of due diligence research visits. Only the best communicators are usually presented to researchers. This understanding is so ingrained that roles and promotions often depend critically on communication skills in consultant and client meetings. These many layers of polish take some getting through.
Getting under the bonnet
Over the years my colleagues and I have experimented with a variety of methods to get beneath the surface of managers in face-to-face meetings/interviews:
· recognising that our main advantage was the power of comparison, we would compare stories for accuracy across different individuals in a team or have face-to-face meetings with all the managers of a particular strategy/sector in a short period of time;
· leveraging the privilege of being able to interview people at all levels of a company from CEO’s, to fund managers and analysts, to risk managers, operations and support;
· monitoring what was said in meetings with subsequent on-the-desk research of portfolio positions, key risks, changes to decisions over time and in different market conditions;
· retaining an element of surprise, visiting managers at short notice (like the Ofsted inspectors that turn up to schools unannounced) and asking to see people who hadn’t been prepared;
· getting trained in the art of enquiry, asking probing questions around uncomfortable issues, using silences, ensuring that we aren’t just being presented to and focusing the discussion what matters most;
· forming our own view of third party research, tools and systems, including speaking to the banks/sell-side for their experience of fund managers dealing practices.
One of the most effective techniques I used was to share my research notes with fund managers, appealing to the ‘better angels of their nature’, moving to a much more open and honest basis of engagement.
The common traits of the best fund managers
As I mentioned earlier, I have had the privilege of hiring and managing some amazing investment talent over the years and they tended to have the following traits in common:
· an ability to make decisions in the absence of complete information (otherwise it can be too late);
· a natural appetite for taking risk and being at risk (of loss);
· a clear sense of personal accountability, rather than deferring real decision making to committees;
· seriously competitive, they compete with some of the smartest people in the world and their performance is visible to all daily;
· tremendous pride for their craft, they are fascinated by how markets work and evolve;
· surprisingly imaginative, creative and lateral thinking; they think about “what may happen?”, “what could go wrong?” – which is often the best form of risk management
· make decisions intuitively, based on years of experience and practice, making it difficult/artificial to articulate how they make decisions, in terms of a clear process. Yet it is a clearly articulated process that so many manager selectors look for.
An aside – The problem with graduate recruitment
Some of the best fund managers I have worked with had not had a conventional financial education. They are not all Maths and Economics graduates. They were not all A-grade/1st class students. They were not all head boys/girls and had not all trained for the Duke of Edinburgh award. In fact for a number of them, their risk taking traits were formed in their early years.
The crazy thing is despite knowing this, most fund management companies only recruit Maths/Economics graduates, who have their sights set on becoming fund managers every year, from the best universities, with the best grades, even though this rarely provides the best material to train a good fund manager.
It’s a real bug-bear of mine as I think investment teams also need to hire fund managers from off-the-beaten-track and seek out those with not only the mental resilience and market savvy but also imagination, risk-taking sensibility and a strong sense of personal responsibility.
I am a big believer in active management (alongside passive and smart beta management), in particular that some people and teams, in some asset classes and market environments, have the ability to consistently outperform their peers. I have also worked with some great manager researchers and conducted research on asset classes and strategies where good research adds meaningful value for clients. At the end of the day good manager research is not all that different from good fund management.
Going forward, I feel the best consultants will focus their resource and attention on identifying and quickly assessing managers, strategies, or asset classes that have compelling sources of return (to help their clients get in early before the crowd) and even more importantly help their clients get out early enough to not be left with the masses trying to squeeze through a tiny door. Manager research will need to become part and parcel of a good investment process, aligning bottom up with top down, with sole the objective of making money for clients, rather than just picking safe funds and managers.
In my opinion, the best fund managers and manager researchers tend to have one or more of the following sources of competitive advantage:
1. Information edge – access to better, broader, more reliable or more timely information
2. Processing edge – ability to sift through data to quickly identify the key issues (qualitatively, quantitative or both)
3. Decision making edge – ability to make good decisions more often than not (alone or as part of a team) and often in the absence of complete information
4. Execution edge – ability to access deal flow and the best market pricing, in size and in times of crisis
5. Resilience / Humility – ability to stick with a good decision in the face of pressure from the business, market or peer group balanced with the humility to know when you’re wrong.
I would love to hear your thoughts (Reply below or to [email protected]sheth.com).