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Numbers might give you some comfort but they don’t tell the whole story, according to CFS. To get that, you have to dig a little deeper – and take a lot of meetings.
Picking a stock picker can be as tricky as picking stocks. Hard data will only get you so far – the time series necessary to establish beyond a shadow of a doubt that performance comes from skill, not luck, extends into the decades – but nobody wants to hand out a multi-million-dollar mandate based on gut feel.
Best practice lies somewhere in the middle, according to Ben Lam, head of equities at Colonial First State.
“You can get a lot of comfort around numbers,” Lam tells ISN. “And they’re a good starting point. But digging deeper into them and how they’re used is more important, and is what I see as the art of manager selection.”
CFS pursues an entirely outsourced investment model, and, like all of its Australian institutional brethren, operates in a fee constrained environment. You need to have “clear articulation” around why a manager is used and what competitive advantages they have, Lam says.
“Monitoring is really just to ensure that confidence remains. Inaction is action; change in our manager line-up incurs a lot of cost to members because of the associated transaction cost. You don’t just want to make them to chase performance.”
Nor do you want to fire somebody based entirely on a run of bad numbers. Underperformance can be caused by style headwinds – perfectly explicable and expected, and not in of themselves a reason to remove a manager from the portfolio. Sometimes it’s caused by organisational change; even the quiet departure of a few analysts be a sign that something is wrong.
“Every time you speak to a manager there’s always a nice story about why people have left,” Lam says. “But if there’s a persistent theme we’ll want to do mini exit interviews to test whether there are cultural or team dynamic changes that have led to departures, and that might cause you to question what’s really leading to underperformance.”
There’s other red flags too. Managers can be in the right stock for the wrong reason; managers can try to pass luck off as skill; managers can have an investment ‘philosophy’ that has little to do with their investment process, or demonstrate an inability to adapt to changing markets.
“They need to be able to consider changes in the economy and market. AI is going to be the interesting one, because it’s going to change corporate dynamics for everyone and managers need to figure out how to deal with that.”
But there’s also constant stream of managers demanding consideration, with a new boutique bursting onto the scene every other day and a host of international managers heading to the land down under in the hopes that our biggest investors will make an exception for their fee structure. But even with all the noise you should never say no to a meeting.
“You have to have the openness to engage with any manager; it’s not always the most positive meetings you want to follow up on,” Lam said. “The most polished packs and presentations you come across aren’t necessarily the best managers – it just means they’re very used to presenting to potential investors. Whereas some very good investors might not be the most extroverted and natural presenters – and if they aren’t great at marketing then they’re not going to have as much in the way of assets under management, and that can be attractive for us.”
“It’s being open to taking on as many meetings as possible, because even if I have confidence in managers that I have you always want to look at improving your manager line-up or reinforcing your confidence in existing managers.”
But there’s always one or two good reasons to pass on a manager quickly.
“Ask them about mistakes they’ve made,” Lam says. “A good manager is always reflective, and if they can’t come up with something on the spot then they’re not constantly thinking about how they can improve.”
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