The evaluation and selection of investment managers can be considered a combination of science and art. It requires a mosaic approach in which various pieces of information from multiple sources must be joined together to develop a holistic picture of a manager’s capabilities.
The quantitative part of the process, or the science is integral, but it is backward-looking, and as the saying goes, “past performance is not an indicator of future returns”. The qualitative part of the process, or the art, is even more critical in determining a manager’s future performance. At Absa Multi Management (AMM), we apply a consistent framework in our qualitative assessment of investment managers and an on-site due diligence forms an essential part of that assessment. Having been forced to conduct these due diligence engagements virtually for the past two years, members of the AMM team took the opportunity to spend a week in London recently where we resumed on-site manager visits on close to 30 investment managers.
An on-site due diligence gives us the opportunity to observe and assess a firm’s culture and work environment, as well as the interrelationships between investment team members. In addition to this, it confirms our desk research of the manager’s organisation, investment philosophy, investment process, portfolio construction and historical performance. Close attention is paid to how consistently a manager follows its processes, whether it is clearly articulated and the degree of integration of Environmental, Social and Governance (ESG) aspects within the investment process. Face-to-face engagements with analysts and portfolio managers enables us to determine the extent to which ESG is embedded in the culture of the firm and in the investment process and also gives comfort on the depth and quality of research conducted by the manager. Many investment managers merely employ ESG as negative screening of the investment universe or even go as far as green washing. Our visits in London entailed meeting with portfolio managers, analysts and business development professionals and we found that while team cultures differed across firms, they all encouraged thoughtful debate, were performance-driven and supported a team-oriented approach towards a common goal. One of our emerging market managers, GQG Partners, for example, has put together an analyst team with very diverse backgrounds spanning traditional finance, investigative journalism and credit analysis. This creates a culture where different opinions are embraced and allows analysts to develop views that no one person can individually have and to find perspectives that are different to the traditional Wall Street consensus.
One of the first steps in our analysis is to investigate the structure of the investment firm. Our preference is for a manager to focus on just one investment discipline as employing too many different strategies can dilute the manager’s efforts and reduces the time dedicated to portfolio management for each product. Artisan Partners is one such global manager with a particularly attractive organisational structure. The firm consists of nine investment teams, each of which has their own dedicated relationship management team and is completely independent with regard to their investment strategy and decision-making. Shared services such as trade operations, HR, finance and compliance are performed at the group level, leaving the investment teams free to focus on generating results for clients with no other distractions. Artisan’s investment teams span Global Value, Global Growth, International Value and Emerging Markets. AMM is invested in the Artisan Global Value strategy, which is managed by the Global Value team.
The calibre of human capital and investment talent is another factor that is best evaluated through face-to-face interaction. Talented managers show their superiority in their approach to risk management, how they gather and synthesise public information and then utilise this to take meaningful active exposures that express their conviction. While all our invested managers possess superior stock-picking skills, Mundane Asset Management is one that stands out over the long term for their concentrated portfolio of world-leading companies. The Mundane World Leaders Fund, in which AMM is invested, has held 12 of their 15 holdings for over a decade and were one of the first managers to recognise the growth potential in Amazon when they initiated a position back in 2006. The stability of an investment team is also an important consideration in evaluating an organisation. High personnel turnover, for example, is a massive red flag that can point towards underlying structural or organisational issues within a particular firm. A reassuring trend within AMM’s invested managers is a long tenure among investment professionals and strong succession planning that extends from senior to junior employees. One of our long-standing core managers, Independent Franchise Partners, does particularly well at acquiring talented individuals early on in their careers and taking them through multiple layers of training and mentoring to fully equip them for more senior leadership positions later in their careers. The manager has multiple leadership tiers with the first, second and third generation of leadership knowing exactly where they fit in and what trajectory they can expect their career paths to take. This approach ensures that employees feel appreciated and that investment teams are willingly locked in for the long term.
Ultimately, the goal of the manager research process is to identify and monitor investment managers that are capable of producing excess returns against their benchmarks over the long term after management fees are taken into account. Consistently identifying such managers is not an easy feat and the difficulty is compounded by the ever-changing nature of the industry and financial markets as well as the fact that investment success in the past does not guarantee similar future returns. On-site due diligence engagements are designed to assist and supplement the overall manager research process and to gauge how non-investment factors can influence the investment process and a manager’s ability to replicate past successes. After the due diligence of our global managers in London, the AMM team remains confident that we have identified and selected superior investment managers who have a high likelihood of producing attractive risk-adjusted returns for our clients.