Manager selection experts share what they’re looking for.
By Kevin Flanagan
Share post
“We don’t think we were wrong, we think we were early.” You’ve probably heard that one before — it’s a classic explanation from active portfolio managers, but it “rings the alarm bells” for Evan Frazier, a senior research analyst for the Chicago-based investment consultant Marquette Associates.
Evan and Joe Wiggins, a veteran manager selector and Director of Research at St. James’s Place in London, recently joined Essentia CEO Clare Flynn Levy for a live webinar to discuss the new types of questions investors are asking portfolio managers — and the answers they like to hear.
Here are some of our favorites:
| 1. | If you were to run your strategy systematically as an algorithm, how would you do it?
When Joe is assessing a portfolio manager, three things matter to him: (1) The manager’s beliefs about markets and their competitive advantage, (2) The manager’s decision-making process and how they consistently link it back to their beliefs, and (3) The outcomes that result from those beliefs and processes. The question above is process-oriented. The manager’s response reveals which parts of their decision-making process can — and cannot — be captured by a purely algorithmic approach (i.e., where is human cognition adding value?). |
| 2. | What are some mistakes you’ve made throughout the strategy’s history or your tenure? How have you reacted?
“Every PM loves to talk about — and can talk about — the winners that they’ve had,” says Evan. “But I think it’s helpful to get a sense of when things may not have worked out.” Allocators want to hear (or better yet, see evidence) that the manager has examined what went wrong — and isn’t just blaming bad luck. They want to know what the team learned from the experience and how they’re putting that learning to work toward better outcomes in the future. Demonstrating humility, accountability and objectivity goes a long way with sophisticated investors these days. |
| 3. | Assuming recent performance is not necessarily a good indicator of your skill level, how do you measure the success of your decision-making?
This is one of Joe’s top questions from an outcomes perspective. He’s not necessarily looking for anything specific — he’s interested in whether the fund manager has considered a question like this, which ultimately gives him insight into the philosophy and approach behind the strategy. “If they were taking a view that headline performance was all you needed to know to assess whether someone had skill or not, I would be incredibly skeptical,” he says. We certainly have a view about how to accurately (and predictively) measure decision-making skill: see the Behavioral Alpha Benchmark. |
| 4. | How has your investment process evolved?
Both experts agree — while investors hear alarm bells when a manager’s decisions are at odds with their stated philosophy, they do expect to hear that the investment process is evolving as the available technology changes. “Clearly no investor has got an unimpeachable or perfect process,” says Joe, but he cautions that changes are too often based on one single, painful example. “You really want to build up an evidence base and recognize patterns in your process and decision-making about where you can potentially make enhancements.” |
It’s obvious that times are changing in active fund management. Transparency is increasing, data is becoming more available, and a new generation of investors and fund managers is more interested than ever in building authentic client relationships. Is your team ready to answer tough questions like these?
If you’re a portfolio manager hoping to put your best foot forward with investors — or an allocator seeking managers with true decision-making skill — don’t hesitate to reach out and learn how Essentia can help. You can also subscribe to our mailing list for more content like this.
To watch the full webinar with Joe and Evan, please provide/check your information below and confirm that you’re human – thank you!
