An important task for many investors is to identify fund managers that consistently outperform their benchmarks, with acceptable levels of volatility. A big part of that process is often dominated by looking at the numbers but, in my opinion, the qualitative side is too often underplayed.
I’ve worked in the City for 25 years, most of that as a fund manager, and I’ve also managed teams of fund managers. So I’ve thought long and hard about what makes a good fund manager.
For me, a key starting point is to match personalities to mandates. One of the best ways for fund managers to excel is to ensure that they can fully express themselves through the mandate they are responsible for. It sounds simple but, for many different reasons, ranging from internal politics to self-denial, or simply circumstance, fund managers often run mandates which are unsuited to their characters.
For example, I’ve seen very cautious individuals try to run risky mandates and structural equity bulls put in charge of low risk dividend funds. If they’re very good they can fake it but more often than not it just doesn’t work. If they’re lucky, they get a second chance. Then, once the fund is matched to personality, and if an appropriate investment approach brings together the personality and the mandate, the turnaround can be phenomenal.
Normally, I get a feel fairly quickly for the type of fund manager someone is and so the type of mandate they’re suited to. More important though is whether the fund manager has a good sense for the type of investor they are. Human nature being what it is, many fund managers prefer to remain in denial rather than face up to some unpleasant home truths. The first point to recognise is that human beings, dominated as they are by their emotions, are unlikely to outperform on a repeatable basis.
Nevertheless, good fund managers do exist and they tend to have a decent insight into their psychological profile and therefore their shortcomings. The really excellent fund managers, though, take this a stage further and play to their strengths and address their weaknesses in their daily procedures.
For example, one fund manager I worked with would never act immediately on a large share price move, forcing himself to spend time thinking rationally about the correct course of action, rather than impetuously acting on emotion. This strategy was highly successful. Other fund managers also address the weaknesses in their personalities by creating simple but ultimately highly valuable rules. One fund manager that I worked with for many years was vulnerable to being sold an exciting story by the market, so he stopped speaking to stockbrokers, another colleague found the day-to-day noise too distracting, so got rid of her Bloomberg screen.
Knowing your limits is an important dimension of self-awareness. For example, fund managers often have skill in an area, be it stock selection or market timing, but fail to understand how much. For this reason they sometimes fail to scale positions correctly, believing the strength of their opinion is a good guide to position scaling. In reality, their skill, as is the case with all fund managers, is limited and therefore scaling needs to be dominated by portfolio construction concerns. As a consequence, an inexperienced fund manager might allow the randomness of markets to drive their performance, as opposed to their own skill level.
Fund management has been, and always will be, very intellectually and emotionally challenging. In my experience, those fund managers that best cope with these two areas, are most likely to succeed.
David Jane is the founder of Darwin Investment