Identifying successful fund managers - behaviours play a vital role
The rise of passive investing over the last decade has placed increasing focus on active managers as investors try to judge whether actively managed strategies are worth the additional costs. In addition, the FCA has been explicit that active managers need to do more to demonstrate that they are delivering value for money.
Both of these points are absolutely right, however, it should also be remembered that there are a significant number of active managers that have delivered exceptional returns for the investors over a long period of time.
Having met literally hundreds of managers over the last 18 years, I believe there are some common characteristics in those managers who have delivered outstanding performance. While having these attributes is no guarantee of success, they show a level of self-awareness and understanding of their approach that gives them the best possible chance of delivering outperformance.
The first of these is curiosity. The global economy and investment world is something that never stands still and therefore the need to keep on learning is critical. Rapid changes in human behaviour, our consuming habits and technological development, as well as unprecedented economic issues such as negative interest rates and Quantitative Easing, have all required fund managers to reappraise how they think. A quest for constant learning and development is necessary in order to keep on top of these issues, and while it may seem like an obvious characteristic for successful managers to have, in my experience there are fewer managers than you might think who literally live and breathe investing. After all, how many managers can you name who you think ‘will be an investor until the day they die’.
The second characteristic is discipline. There is an obvious requirement for successful managers to have a strong investment philosophy and process, as this separates the skilful from the lucky. However, it is possible to have both of these and fall down on the execution. This can happen during major inflection points when managers loose the discipline of following their investment process as they start chasing performance due to worrying about career risk. Those who can show patience and discipline during these times, such as Neil Woodford is doing at the moment, have often been rewarded over the long term.
The third key attribute is tenacity. The world of fund management is a competitive arena and a hunger to succeed is vital. Unsurprisingly, asset flow typically goes to those managers with strong performance and therefore outperforming your competitors is a key element of success. Some managers definitely have an acute sense of competition and this desire to win can be a major motivational tool. One manager who has exemplified this over time is Stephen Snowden of Kames Capital. He has always been very open about trying to beat his competitors and clearly this is a motivational tool for him to try and succeed.
The fourth is self-awareness. Understanding your own weaknesses is always a difficult thing to do, especially when it comes to the dog-eat-dog world of fund management. However, those managers who understand not only where they can make money, but also where they can’t, have a much better chance of making money over the long term as they are likely to make fewer mistakes. This relates strongly with the attribute of discipline and the ability to consistently implement the investment philosophy and process.
The final attribute is related to self-awareness and its humility. When everything is going well and performance is strong, this is not always a very natural attribute for a fund manager! However, those managers who have humility will know that the market has a brilliant way of bringing you back down to earth just when you thought you had won! This attribute is key to controlling excessive risk taking and gives the fund manager the ability to remain rational at times when they may feel like increasing risk just like a gambler in a casino who tells you they are on a hot streak!
Without question, behind every successful fund manager is a strong investment philosophy and process, however, I believe the behavioural characteristics identified here are major contributory factors in how successful fund managers think and act. This is by no means an exhaustive list and there are of course many behavioural aspects to investing that fund manager’s exhibit when making their decisions. However, when making your own assessment of fund managers, don’t just think about the written down investment process that the fund manager is following; think also about how they behave and act, as this can be vitally important in identifying successful investors.