Rooting for success: three tips for choosing the right fund manager
Inspired by the recent performance of England cricketer Joe Root, Investment Propositions Director Stuart Podmore explains why a sound philosophy, a good team and a good process lie at the root of all success for both England's cricket team and investment performance.
02 Aug 2016
Unstructured Learning Time
Just when you thought Leicester City was the sporting performance of 2016, along comes Joe Root with one of the finest all-round cricket displays as England won the second Test Match versus Pakistan at Old Trafford.
Following our articles earlier this year looking at Leicester City’s remarkable Premier League victory, I wanted to show that we at Schroders believe there is more to life than football (although the late, great Liverpool manager Bill Shankly would disagree).
Once again, it is hard not to hear the echoes of Root's and England's performance in the challenges of successful fund management.
Balancing risk and reward
Reading the quotations and interviews in the post-match analysis I realised that, following a sound beating by Pakistan in the first test at Lord's, England was reminded of just how important risk and return consideration should be within their overall test match philosophy.
As England captain Alastair Cook explained on BBC radio: "The tempo of our batting was more like a Test match; we were playing high-risk shots for little reward at Lord's."
And therein lies the rub for fund managers. It all sounds so simple, but reflect for a moment on the fact that so called high quality, defensive stocks (stocks that provide a constant dividend and stable earnings regardless of the state of the overall stock market) are trading on 25x price earnings (valuation that measures a company’s current share price relative to its per-share earnings) . That’s high risk for little reward.
The England cricket team suffered from that risk reward imbalance too and recognised it needed to change before the second test at Old Trafford.
Maintaining discipline and courage in adversity
We have seen something similar unfold in open-ended bricks and mortar property funds over the last post-Brexit month, evidence that many investors ignored the risk reward profiles and the consequences of holding illiquid assets in a sentiment-driven sell off.
Without the right cornerstone philosophy, with the discipline and courage to see it through, fund management is lost.
So what else can we learn and how might this help advisers choose fund managers for their clients in future?
1. It's all about the team and strength in depth
There is no doubt that this has been a team effort from England, even when individual performances stand out.
Yes, Root was approaching perfection, but Captain Cook, fast bowlers James Anderson, Chris Woakes and Ben Stokes were all very positive supporting stories, with contributions that made a difference.
Political satirist and statistician Andy Zaltzman tweeted "First Test in which no England player has been out in single figures since Durban, Boxing Day 2009".
It always strikes me that when fund management teams experience turnover, it’s then that you realise whether or not there is true strength in depth. Fund management is all about succession planning if you want to stay in the game for 200 years or so and provide those long-term returns.
The England Lions (the future and fringe England squad players), incidentally, have won all four of their matches against Sri Lanka and Pakistan.
2. Maintain the process and avoid the pitfalls
“I think any good team is judged by how they come back from bad performances”, said England cricket coach Trevor Bayliss on Sky Sports.
Although the Lord’s Test was a disappointment, the team stuck to its process and conviction, and all players executed well.
Fund managers will have periods of under-performance over time (just ask any value manager who seeks stocks they believe the market has undervalued how it felt in 2015), but remaining disciplined in the face of that criticism, learning how to react to that disappointment with the head and not the heart, and being able to bounce back with the benefit of genuine understanding is the mark of a strong fund management team.
3. A little bit of luck can go a long way
All the experts recognised that it was a great toss of a coin for England to win at Old Trafford. It allowed them to bat first on a benign pitch.
Sometimes the turn of a coin can make a difference; it is chance that gives you the opportunity to show your true ability.
Don't be stumped by arrogance
As we move into the third test at Edgbaston, the confidence in the England camp is tangible. There is, however, an absence of arrogance (how many fund managers fall prey to this very human condition?) and there is a sense that the players are really enjoying what they do.
Sometimes in choosing fund managers, it’s easy to overlook these softer factors.
I leave you with one final thought: in the final analysis, seeing others perform strongly around you has a habit of forcing everyone to up their game.