Monthly commentary

Introduction

People who work as professionals in investment management will be expected to have qualifications that allow them to apply accountancy based ‘rulers’ over prospective investments, understand at least some basic ideas of statistics and probability and even know the meanings of various Greek letters in the context of their work. In my (unscientific) opinion this seems to explain why fund managers with degrees in the arts or humanities are on average less succesful than those who trained as accountants or who better still have advanced science degrees. Past students of economics may claim to be scientists, but in my opinions they are usually far from that!

There is a similarity between predicting the future returns from investments and weather forecasting. A great deal of computing power can be applied to analysing the past and some human expertise can be added to interpret that data, but in reality, the best we can hope for in terms of reliability is an indication of the most likely outcome.

In the case of the weather it is the scale of the systems operating across the globe (the impact of nature, in short) that makes precise longer term predictions impossible. In the case of stock markets, it is another aspect of nature that can be fickle or not well undestood: human behaviour.

In this weeks post, I intend to explore some ways in which I think investors can apply some ‘art’ in selecting fund managers. You might find what I have observed to be obvious common sense, but I know that many people imagine the people who work in investmemt companies are some sort of elite with wondrous skills. In spite of the fact that many are paid very highly, they are often far from that.

I once wrote that an actuary is someone can reliably calculate the probability of a good salary. A fund manager is usually someone who likes testing out personal prejudices with other people’s money!

A fund manager’s career path

If you have researched funds in detail, you will have read many mini CVs of fund managers as published in fund fact sheets and maybe expanded on the fund group’s web site or in Morningstar analyst research. Of course, in real life, not everyone makes progress for simple reasons of merit or seniority!

Most of the people with responsibility for the final purchses of investments, maybe from lists provided by a process within their firm or maybe just anything they like, will have reached that pinnacle of authority after working as an analyst in the same firm or in a bank or stockbroker. A few might have worked in industry (say as a pension fund manager or accountant) or ocassionally come out of the military or agriculture. Once upon a time, there was a good chance they went to a public school, but the globalisation of UK fund managmenent groups has diluted that particular “chumocracy”.

Most will have added a formal investment qualification to a degree at Bachelors. Masters or even Doctorate level. I have noted a number of people who took physics doctorates as successful fund managers. Such extra qualifications will usually have been secured many years before a the person got to be ‘running money’, but such is the nature of education – our GPs may not have taken an exam for 20 or 30 years. There are of course compulsory Continued Professional Devolopment programs (usually lightweight in my experience).

So far I have outlined the sort of moulds from which our fund mangers are formed and in truth they are a reasonably homogeous bunch, but….

The ‘star manager’ or entreprenuerial fund manager

In his book ‘The Magic Mountain’ Noble prize winning author Thomas Mann introduces late on a striking character that he portrays as a ‘personality’. This individual is able to secure the attention and approval of his associates and friends without saying anything useful, structured or intelligent. This is shocking because earlier in the book, two other characters have been developed as highly educated and intelligent debaters with opposing viewpoints – one a humanist, the other a Jesuit. They just disappear into the background, outshone by the high wattage competition.

The author has in this book shone a bright light on a very important aspect of human behaviour.

We have had the opportunity to observe first hand in politics right now how an individual can rise to the highest level of influence simply by the force of an unusual (perhaps abnormal?) personality. I refer to Donald Trump of course, but one can probably say the same about Boris Johnson, Vladimir Putin and in the past the likes of Stalin, Tito and without doubt Hitler. The list in politics will be a long one.

Now what happens in politics is a mirror of most other aspects of human behaviour, albeit maybe a magnifying mirror. Someone who has the personality to push themselves forward, perhaps because they have ideas they want to try out on their fellow humans, maybe because they want great fame,wealth and luxury or simply because their brains works that way (as withh the classic personality disorders).

My research has shown me that the more extreme personality types (the most ‘pushy’, one could say) tend to get to the top in politics, the entertainment business and in business….

….and in investment management.

Because investing other people’s money is a highly regulated process in the developed world, there are systems that bear down on these most self opinionated of individuals so that their superfluity of confidence, which may through luck or skill see them having runs of success, is at least on a leash.

Those who are not happy with the constraints of others whom they regard as lower mortals will wait until they have a good repuation, have earned enough to fund a new business and talked some colleagues into the joys of escaping the bureaucracy and announce their new business – usually with their name on it.

The implications

Some of what I next propose is based on real events, actual examples and some is based on my own thinking about human behaviour.

There is in my mind no doubt that an intelligent mind is likely to bring an individual into conflict with the objectives and day to day operations of a large international business. Businesses are in effect organisms and their operations are designed to protect the whole in as efficient a way as possible. There is usually no room for mavericks. Who would want to be Elon Musk or James Dyson’s line manager?

The most skilled senior managers know how to manage the best and even the most indepenent thinking employees early in their careers but eventually the strong willed individual acquires enough status (the ‘star’ badge) such that they are almost unmanageable. I am not an innocent in all this – my accountant once said to me that he and I were alike in that we were unemployable, meaning we had got to the point in life where we wanted to test our ideas without a hint of supervision. Good fund managers reach that point sometimes.

Some will set up a business with insufficient parallel resources, such as in compliance or sales and marketing and will simply be unprofitable. This is very common and many managers move back into the fold of a fund group that is a little more respectful of them than their past employer and they then run funds in a semi authonomous way, but with appropraite controls. Jupiter, Liontrust. Premier Miton, MAN GLG and others all have managers working for them that have been through that loop and in my judgement that is a positive. They have pulled their horns in a bit but still have individual talent.

Others, and this is where we must take extreme care, in spite of having very few people working with them, see their businesses storm ahead and so they attract billions in funds. You will know some examples: the now disgraced Neil Woodford, the very rich Terry Smith (Fundsmith), Messrs Lindsell and Train, Alexander Darwall (Devon). Others may be less familar – Teviot, Crux and Chelverton, for example. It is perhaps significant that the last 3, although all founded by people ‘setting up on their own’, do not have the founder’s name out up front!

The wrap

In summary, it is no surprise that quite a few top fund managers have strong personalities. This may be what got them to the top, rather than any other special skill. If they find the restraints of corporate life frustrating, they sometimes go off and do their own thing, with or without associates strong enough to rein in their wilder ambitions, whims and personal biases.

Most will fail and return, chastened to the corporate fold. A very small few will succeed and get very rich, which probably means they cease to be actually running money anyway. A separate small number will take a wrong turn or two, refuse to reverse and end up losing an awful lot of other people’s money.

As investors, we need the art of assessing people in general and using that in a common sense way to assess the risks of trusting our money to ‘big personalities’. As a rule of thumb, I don’t trust the breakaway new funds!