NEW YORK: Back in August we covered how career risk meant many active managers were too worried to deviate too far from their benchmark.
You might think it would follow that those picking funds and fund managers would take a similar approach. They would be pre-disposed to selecting either passive strategies, active ones that look like indices, or, at the very least, big, well-known brand names that other investors also like, for fear of standing out from the crowd if things don’t work out.
But this is not necessarily how career risk works in manager selection, at least according to a recent panel discussion hosted by yours truly called ‘Confessions of a Fund Analyst.’
Instead, particularly for young analysts, the desire to score an early hit and establish oneself can result in rejecting well-known, safe options, in favour of trying to unearth a hidden gem.
As Shannon Saccocia, CIO of Boston Private Wealth, told us:
‘In the private client world, I think the idea of manager search, selection and due diligence 15 years ago was really based on trying to differentiate from the consultant pack and… we were really trying to find emerging managers that wouldn’t necessarily qualify for a consultant’s list.‘In [doing] that, you’re looking past several seasoned strategies in order to find that diamond in the rough and occasionally, I think, what happens when you’re searching for that, is that you overlook some red flags… in order to find something that could be a home run.‘It’s difficult, particularly when you’re a younger analyst, to be comfortable hitting singles and doubles because you’re looking to make a name for yourself, you’re looking to differentiate your skillset and acumen from the others in the room.’
And it is not just young analysts who can fall for the allure of a left-field hit. The experienced and always interesting Bob Boyda from Manulife told us:
‘[We went to an asset manager and] we asked them the question I’ve asked every single investment management company I’ve ever dealt with: “Do you have someone inside your organization who is doing something so unique and so brilliant, but maybe they don’t have the exposure?”‘They said, “Here he is and he’s the quant’s quant, he’s phenomenal. In fact, he’s so good that every single one of our portfolio managers go to him to look for ideas.”‘The glitch was he only ran some small portfolios and wasn’t ready for the $700m we were going to give. He certainly didn’t have an institutional mindset, but we thought he’d grow into it. And boy, we missed a couple of real red flags. One, perhaps an over-reliance on quantitative methods because they shift so frequently. Two, that you can be brilliant at some things… but be particularly poor at portfolio construction. Third, I think we should have given this guy a little more time with someone else’s portfolio. And fourth, why didn’t the organization step up and give him more money before we did?‘Over the course of the time that we had this mandate, which was about two and a half years, we learned a couple of things.’
Of course, shooting for a star is not the only way manager selection can go wrong. It can also be far more mundane. Requests from other parts of a gatekeeper’s organisation (often advisors in the field, or distribution teams) can lead to pressure to add big name or newly hot managers.
Jackson National Asset Management CIO Bill Harding told us about holding one’s ground:
‘We’ll get questions from the field looking at the trailing one-year numbers and [saying] “How come we don’t own this fund that’s at the top of the peer group? How come that didn’t pass our proof process?” I tell them, “We’re not always going to have the number one fund over a given short-term time period. We have to be OK with not having those managers because that performance might not be sustainable, there might be reasons for them to shoot the lights out in one given year.”‘You’ve got to be OK with that and focus on finding managers that you do think are differentiated, and have the disciplined process in place that you think is going to be repeatable over a long time frame, not just have the best quarter or the best year.’
To hear more from Boyda, Saccocia, and Harding on their worst manager mistakes and what they learned from these, you can watch our panel discussion in full here, or read the (unedited) transcript here.
- Why value investing still works in markets (FT)
- Can Bond Funds Repel the Indexers (Morningstar)
- Risk-Adjusted SPIVA®: No More Excuses? (S&P Dow Jones Indices)
- Should Index Fund Investors Care About Tesla Getting Added to the S&P 500? (A Wealth of Common Sense)
- Momentum: If you can’t beat ‘em, join ‘em (BlackRock)
That’s it for this week. As ever, please send any links, thoughts, feedback, and general miscellany to me at email@example.com.