“We don’t think we were wrong. We think we were too early.”
An embarrassing answer that sets off alarm bells for investment advisors.
Higher inflation, increased market volatility and more variable nominal rates of interest are significant opportunities for energetic managers who prove their price with differentiated, customer-focused products. But as energetic management comes under constant scrutiny, investment managers are being surprised by harder questions from an increasingly sophisticated allocation market. Are you ready on your next beauty pageant?
The changing dialogue between allocators and managers
Below are 4 of the most efficient and difficult questions and the motivation behind them.
If you were to systematically execute your strategy as an algorithm, how would you do it??
When evaluating a portfolio manager, Wiggins considers three foremost elements:
- The manager deals with markets and their competitive benefits,
- The manager’s decision-making and its consistency together with his beliefs and
- The results produced by these beliefs and processes.
This query is concerning the manager’s skills. The manager’s answer shows the extent to which he has considered the most effective use of his human energy and the extent to which he has used technology to do things that might be done systematically.
What mistakes did you make in the middle of developing the strategy or during your time in office? How did you react to them?
“Every prime minister likes to talk about the winners they’ve had – and can talk about them,” Frazier notes. “But I think it’s helpful to get a sense of when things may not have worked out so well.”
Investors wish to hear, and ideally see, evidence that the manager has reflected on his mistakes without simply blaming bad luck. They need to know what lessons have been learned and the way those lessons will probably be applied to realize higher ends in the long run. Demonstrating humility, accountability and objectivity are very necessary in today’s sophisticated investors.
Assuming that recent performance shouldn’t be necessarily indicator of your actual skill level, how do you measure the success of your decision-making?
For perspective, that is considered one of Wiggins’ favorite questions. He shouldn’t be on the lookout for a selected answer. He desires to know if the fund manager has considered this query since it provides insight into the philosophy and approach behind their strategy.
“If they thought that a headline-grabber’s performance was all you needed to know to judge whether someone had ability or not, I would be incredibly skeptical,” he says.
This is the core of our Behavioral Alpha Benchmark: It goes beyond historical returns and the impact of luck to measure a portfolio manager’s demonstrated competence in making a variety of forms of investment decisions.
How has your investment process evolved over time?
Frazier and Wiggins agree on this point. Investors wish to see that the manager consistently makes decisions which might be consistent with the fund’s philosophy, but in addition expect the investment process to evolve as technology advances.
“No investor has a flawless or perfect process,” Wiggins notes, but cautions that changing the method should not be based on only one painful example. “You really want to build an evidence base and identify patterns in your process and decision-making to see where you might be able to make improvements.”
Active managers are increasingly realizing that being smarter than everyone else or accessing higher information not provides a competitive advantage. As I actually have explained before, the one thing left is “Behavioral Alpha” — the additional returns you may get from knowing yourself and focusing more on self-improvement than others. And that starts with asking yourself tough questions.
It is obvious that the landscape of energetic fund management is changing. Transparency is increasing, data is more accessible and there are various cheaper alternatives. Managers who’re caught off guard by the harder questions of the delicate a part of the allocation market are at an obstacle. The excellent news is that a brand new generation of allocators and fund managers are more committed than ever to continuous improvement, fostering real partnerships and doing their best for the top investor.
