Thinking about the bright analysts I have had the good fortune to work with, and looking back at the lessons learned from my own mistakes, I have come to the conclusion that there is a life cycle to the way multi-managers approach manager selection for their funds.
When first meeting fund managers, inexperienced analysts fresh out of university tend to be surprised at the lack of academic rigour employed by a number of the most established ones. Some of the approaches and investment methods that they encounter have little, if anything, to do with what they learned in their lectures.
After a few years as multi-managers, we come to grips with the fact that not every fund manager goes through a rigorous optimisation process and that very few actually consider tracking error to be a relevant measure of risk.
As we are exposed to more and more of the City’s best minds, we begin to develop a good understanding of the styles, approaches and characters in our industry and one day, we fall in love. We find ‘the one’. We meet the best, or at least the best for a region or a certain style.
But while there is nothing wrong with developing complete admiration for a particular manager, it is wrong to then expect all the others to be just like him or her. I very often see analysts hinting that someone they are in the process of researching cannot be that good, as he/she holds a stock that their idol loathes.
As we mature, we tend to understand this and recognise that although all roads do not lead to alpha, there are many ways, sometimes by very different paths, to outperformance.
This is usually the time when we have gained enough experience to develop our own approach.
We then come up with our ‘real right way’ to do things. After all, it makes sense. We have spent years talking to the most skilled fund managers there are (not to mention the others) and they have all told us their secrets, so we are ideally placed to come up with the ultimate approach. Or are we?
There is nothing wrong with having very strong convictions about investing. Actually, I see this as a prerequisite for performing our job. One has to be very careful, though, not to fall into the traps of narcissism and confirmation bias.
If we have a very strong belief that things should be done in a particular way and a deep enough knowledge and focus on our investment universe, we may develop a propensity to talk only to those who are somewhat aligned with our way of thinking.
If your opinion is being confirmed by some of the most famous names there are, you will most likely stick to your belief rather than try to proceed with a fair, balanced analysis. This is a very dangerous approach indeed, as it is usually followed by people with a high enough level of seniority not to be challenged within their team.
It seems that in our search for outstanding managers, we need not only to develop our skills but to remain aware of our shortcomings too.
I do not believe there is a quick or easy way to address these challenges. However, involving people of different seniority and backgrounds, and respecting all opinions, greatly helps in managing, if not avoiding, potential potholes in the road ahead.
François Zagamé is a multi-manager at Old Mutual Global Investors