Standing out from the crowd

Every fund manager wants to be the best,” says Kok Hoi Wong, chairman and CIO at APS Asset Management in Singapore. “If you are one of the best you are going to attract assets and you are going to do very well financially.”

In Asia, the desire to achieve personal success is possibly even stronger than in the West, as memories of poverty are still very fresh in people’s minds. After all, it is only in the past couple of decades that Asians have become wealthier. But whether it is Asia or any other region, mutual funds have not really added value for investors. One of the main reasons for underperformance is that there is “tremendous pressure” for fund managers to generate returns in the short-term.

Past performance league tables are still seen as the bible by many fund selectors, and fund managers are increasingly driven to buy the most popular or the hottest stocks, in an attempt to chase performance.

“Many fund managers become momentum, short-term investors,” observes Mr Wong. But short-term trading leads to underperformance in the short and longer term. “Investing is a zero sum gain, in fact it is slightly negative after costs. If every fund manager is buying the same stocks, nobody can outperform.

“In order to succeed in our business, one has no choice but to be a contrarian investor and take a long-term view. You must do things differently from the crowd,” he claims. In a boutique firm like APS, the solution comes from appointing the best managers as partners or shareholders, so they can participate to the long-term success of the company.

Noise insulation

Stephen Millar, managing director UK at Norwegian asset management house Skagen Funds, believes that portfolio managers being based in Stavanger, South West Norway, is one of the strengths of his firm. “Particularly if you are a long-term investor, being away from the major financial centres allows you not to be influenced by that short-term crowd syndrome,” he says.

Going to the same conferences or socialising with industry colleagues can distract fund managers from their investment philosophy and lead to a substantial increase in portfolio turnover. The very low turnover ratio that characterises Skagen’s high alpha equity portfolios is mainly due to this “noise” insulation, he says.

Especially when markets become uncertain or volatile, the risk is the manager deviates away from their investment process, possibly as they surrender to the pressure that may come from their company’s management, shareholders or investors.

“Fund managers must be consistent in their approach and they themselves must believe in it,” says Robert Farago, head of asset allocation at Schroders Private Banking. “Their belief is tested when they underperform and there is pressure from their management. That’s when you really need to be confident they are going to continue to adopt the same approach.”

In these cases, it certainly helps to be an experienced manager, “because generally it takes getting it wrong a couple of times to realise how it works”.

“The most successful managers tend to be those that have strong views on the market and who invest with conviction,” agrees Henriette Bergh, head of manager selection strategies at Morgan Stanley.

That does not mean that a high conviction manager is always right, as every active manager has tracking error around the benchmark. “When you invest with an active manager, you gain exposure not only to an asset class but also to an active investment philosophy,” she says. “You need to give the manager a chance to deliver and execute their investment philosophy, which should be measured over a market cycle.”

The secret is to achieve that right balance between being contrarian – and being able to stand the management’s or investors’ pressure – and not being overly stubborn, as there is a very fine line between the two concepts, notes Bernard Aybran, head of manager selection at Invesco.

“No fund manager will be right on every bet he makes, but he has to admit he is wrong early enough to limit the damage,” he says. “Fund managers that refuse to admit they are wrong can cost a lot to their clients. On the contrary, if the fund manager goes with the flow and owns the same stocks as everybody else, at best you end up with the index.”

Communication skills

The question is what really makes a great fund manager. Some may indicate performance as the key differentiating factor. Others believe it is about raising assets, depending on whether the definition comes from the investor’s or the asset management company’s perspective, argues Morgan Stanley’s Ms Bergh.

“We believe a great fund manager is someone who is able to add consistent value net after fees, in excess of a benchmark and over time,” she says. A minimum amount of assets is necessary, but a too big pool of assets might affect performance negatively.

In today’s marketing-driven world, how important is the ability of the fund manager to promote themselves, in order to gather assets?

Star managers have strong personalities and public profiles and range from the likes of Franklin Templeton’s Michael Hasenstab, Edward Carmignac at Carmignac Gestion to Fidelity’s Michael Bolton and Pimco’s Bill Gross.

A portfolio manager needs to be able to communicate and articulate their views and investment process, but it is very different from being a marketing person, says Ms Bergh. “It is not because you are a good presenter or a good communicator that you are necessarily a good portfolio manager. When picking managers we feel it is important that there is a focus on managing the portfolios and therefore being in the public eye is not essential,” she says.

What also is very important for a manager is “to stay focused, humble and not to be carried away by his or her success”. To this regard, an incentive structure based on the assets gathered, rather than the performance generated, will have a greater impact on the fund manager’s interest in raising his public profile.

“The more senior the role, the more communication and people management skills matter,” says Rupert Reed, senior partner at asset management executive search firm Godliman Partners. But, while on the retail fund management side, people are buying the personal brand of the fund manager, before the company’s brand, on the institutional side this is less relevant.

“Institutional asset managers have made great efforts to diminish the individual importance of any specific person to the fund’s performance. There has been a strong trend towards the ‘Model T Ford-isation’ of the investment process,” says Mr Reed.

When investing in managers, it is important to monitor the “key man risk”, says Schroders’ Mr Farago. When investing in a team, if you have the confidence that the team will continue to adopt the same approach, then this is not an issue. “But if the fund has been sold on the basis of the manager, and the manager leaves, the risk is that everybody rushes through the door at the same time.”

Yet professional fund selectors are not so immune from the lures of stardom as they are thought to be. “When a fund manager delivers a brilliant speech and market insights you have never heard before, that makes you feel you want to buy their fund,” says Invesco’s Mr Aybran.

“But one thing you learn quickly in this job is there is a total disconnect between what the managers say and their performance figures.”

In fund management, the star culture is becoming stronger and stronger. “The flows today go to fewer and fewer funds. It is the kind of ‘the winner takes it all’ situation. There are simply too many choices, too many funds and the fund manager must somehow be able to grab investors’ attention.”

Performance is not as important as relationship management, especially in difficult markets, says Daniel Enskat, senior consultant at Strategic Insight. “Thought leadership, marketing and information delivery have become crucial in gathering assets from intermediaries.”