I received a great piece of advice back in the 1990s when I first started out in London as a young fund manager at a large European asset manager:
“Clare, great fund managers are made, not born. Investment decision making is something you will always be able to improve upon, and the day you stop being interested in that improvement is the day you should find another occupation.”
A lot has changed since that day, but that advice has never been more relevant.
The active management industry today is buffeted by the rise of passive strategies and insistent calls for higher transparency and lower fees. Not a day goes by without some new article predicting the demise of the human-led fundamental investment managers.
Despite these headwinds, I believe that fundamental investors will not only survive in the future, but thrive.
Research has shown that human brains are still far better than computers when it comes to making the finely balanced judgment calls required in complex and ever-changing financial markets.
This advantage is increasingly supported by the asset management industry’s growing adoption of data-driven feedback loops, similar to those employed in professional sport and other high-performance activities.
Many of today’s managers realize that there’s no longer a competitive advantage to being smarter than everyone else or even having access to better information. All that has been commoditized. What’s left is “behavioral alpha” — the excess returns that can be generated by “knowing thyself” and being more focused on self improvement than the next person.
Today’s most thoughtful investors have a wealth of experience to share with the next generation of fund managers. Each offers a different perspective, but they all share a focus on the importance of learning and reflection.
What makes a good fund manager? A willingness to learn, from your own success and failures, but also from the wisdom of those who came before you.
“Always invest in your own fund. It shows investors you are aligned with them and focuses the mind.”
“Bad news is almost never ‘in the price.’”
“Always be open to hearing views that are the opposite of yours.”
— Ben Wallace, fund manager, Janus Henderson
“While raising capital, it helps immensely to run the strategy with real money or, if that is not possible due to size and instrument size constraints, then as a time-stamped paper portfolio. Then send short weekly letters/portfolio metric summaries to prospective investors with a short comment on views and portfolio changes. Even better, include your auditor on the mailing list. This goes a long way to getting investors comfortable with your strategy, shows your thinking in real time, and keeps you in touch with markets while you’re building the business.”
“Risk management, risk management, risk management. Come up with a well-structured framework that fits your trading style/strategy/psychology. What you lack in experience, make up for with additional structure, process and transparency towards your prospective investors. Show them how you hold yourself accountable to your risk framework.”
“Document as much as possible of your investment decision making process. This will allow you to make improving tweaks to your process and allow for learning and adaptability to different market regimes.”
— Pascal Kummert, portfolio manager and chief investment officer, Calvion Capital Management
“Be skeptical, be critical, and make up your own mind. As a portfolio manager, a lot of people tell you a lot of things. But they may have motives that are not necessarily to your benefit (even when they seem convincing, or are convinced themselves), and they don’t necessarily know the truth any better than you do.”
“Do not get overconfident. Stay disciplined and be prepared to reflect on your personal shortcomings and deficiencies. If you’re not prepared to acknowledge these realities, and seek to improve on them, you have a competitive disadvantage.”
“Integrity is paramount — don’t ever compromise your integrity for a short-term benefit. Success in fund management is a marathon, not a sprint.”
— Gunther Kramert, senior portfolio manager, Union Investment
“Getting a coach to help you improve is as imperative in fund management as it is in elite sport.”
— Mick Dillon, CFA, portfolio manager, Brown Advisory
“If you want to progress quickly, look for an area in the industry that is relatively new and expanding.”
“Focus on building your listening skills, and do not be afraid to ask for clarification of things that do not make sense. Being new allows you to ask the “obvious question” that your more experienced colleagues would like to ask but feel they should know by now.”
“Do not forget that you are making assumptions in all your forecasting. Your model may say the answer is 42 but this is one of many answers that you could have come up with if you made some small changes in your assumptions.”
— Jane Coffey, Insight Partner, Essentia Analytics; previously head of equities, Royal London Asset Management
“We only need to be half a step ahead of the competition. The core of our job is to understand and manage risk. If you try to win by being 10 steps ahead, you are more than likely taking way too much risk and will, more often than not, end up losing. But if you keep reminding yourself that all you are trying to do is be half a step ahead, your risk level is likely to be much more appropriate and you will be rewarded in the long term.”
— Anonymous portfolio manager
“Know your own time horizon (and don’t play to someone else’s). Is it two days, two quarters, or two years plus? If you do change it and play outside your norm, you must do so consciously, intentionally. This is a specific version of the advice, ‘Play to your strengths, not other peoples.’”
“Be aware of, and work on, your own mix of humility and arrogance — you need both!”
“Make a pre-mortem part of your investment process: If the idea you’re proposing were to go wrong — what would be the possible causes?”
“Don’t be a jerk — the industry doesn’t need more of them and it doesn’t help you! In poker terms, keep it tight and aggressive, rather than loose and passive, loose and aggressive, or tight and passive.”
— Ian Beattie, co-chief investment officer, NS Partners
“Build a process, and stick to it whatever happens.”
“Discipline is key: Use stop losses, sizing limits, and other measures to protect you from yourself.”
“Take the time to do a post mortem, especially on trades that have gone wrong.”
— A.E., portfolio manager, hedge fund
“The job of PM will be different five years from now, and again five years after that. Keep your skills up to date with changing technologies.”
“Take a course on data science and Python or R. Managers who have these skills will advance faster than others.”
“Do six sessions with a therapist or coach to increase your self-awareness. This knowledge will be a good basis for the continuous learning and interpersonal skills required to succeed as a fund manager going forward.”
— Cynthia Harrington, CFA, Insight Partner, Essentia Analytics; previously chief investment officer/portfolio manager, Harrington Capital Management
“Know your edge. Slice, dice, and analyze with every tool available to you. Aim to do more of the things that add value, and either remove or focus on improving those things that do not. Understand the implicit bets you are taking and be honest about your ability to add insight about them.”
“Manage the volatility of your edge. It’s no good being long-term right if the losses from short-term volatility prevent you from holding on. Size appropriately, don’t over-trade, and have a plan for the worst case (and stick to it!). Don’t fall in love with your positions.”
“Friends, family, and fitness are the only things that will stay with you throughout the good times and the bad. Remember to invest in them too. Mentally, physically, and emotionally, this is a hard game, and you’ll need all the support you can get.”
— Chris White, global head of portfolio construction and risk, Nezu Asia Capital Management
“Know your own style. When you play someone else’s game because their returns look better, you will lose copying them.”
— David Fiszel, founder and CIO, Honeycomb Asset Management
“Invest an equal amount in executing and refining your process as much as you do in researching ideas. Be open-minded about your conclusions.”
“It’s better to be an expert on a few things than it is to know a little about a lot of things.”
“Hire smart and outsource as many non-critical functions as possible. Minutia can get the best of anyone.”
— Tom Martin, Insight Partner, Essentia Analytics
“Build a process that leverages your strengths.”
“Accept that you can’t be good at everything.”
“Keep refining your process over and over again.”
— V.E., portfolio manager, family office
“Many people new to fund management have a delusional view about what fund management really is. The majority think it is some kind of debate where it’s my opinion versus yours. But in reality, it is about investment processes, logical thinking, and information analysis.”
“Learn to assess yourself dispassionately. The emotional reaction is often to get defensive. In fact, you should be open-minded, as if you are diagnosing problems in a machine. Once you identify the problem’s root causes (not the superficial weakness), create a plan to fix it or find someone else to do that job.”
“It’s vital to think independently. Most aspiring investment analysts fall into one of two camps: (1) doing exactly what consensus are doing, or (2) doing exactly the opposite of what consensus are doing. The truth is usually somewhere in between. Having a clear process will help you navigate the grey area.”
— Victor Lio, investment manager, NS Partners
“Understand the risk you are taking and make sure you are being paid to take that risk.”
“Set risk limits such as size position (max over/under weight) limits and stick with them. Define a limit exception process as well.”
“Think carefully about your process for controlling losers and preventing big winners from turning into losers. Create a formal, documented mechanism for deciding which losers to cut as well as winners to let run.”
— Richard Baskin, Insight Partner, Essentia Analytics; previously director, equity risk management, Point 72 Asset Management
“Keep learning. The best part of the job is that you never stop learning. Make a framework to guide your learning. Read financial history, capital allocation, biographies. Read about industries, corporate strategy, psychology and incentives, great investors, statistics, and investment styles. As well as books, read newspapers and company accounts. Read to understand the world around you but also to understand yourself. Read books about thinking, and make time to write up what you’ve read, and time to think about what you’ve learnt and, above all, make time to apply it. When you read, always think, ‘What’s the application? How will this make me a better investor?’”
— Adam Rackley, investment director, Cape Wrath Capital
Clare Flynn Levy will be presenting on “Applying Behavioral Finance to the Investment Process” at the 72nd CFA Institute Annual Conference, which will be held 12–15 May 2019, in London.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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