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Sunday, February 1, 2009
Seven points

Geoff Blount, CEO of Cannon Asset Managers, identifies what he believes are the seven most relevant points when considering the selection of an asset manager.

1. Consistent philosophy and process
A manager’s philosophy is not just the marketing blurb. It is the critical belief system that underpins everything he does, what you might call his ‘DNA signature’. The philosophy holds that, based on experience, academic research and empirical observations, if an investor buys shares to build a portfolio with a manager with the right ‘DNA’, it will simply outperform the competitors. A sound philosophy should not change over time. The investment process is then designed to implement that belief system.
“Amazingly, most managers in South Africa (and globally for that matter) spend a huge amount of time designing big and fancy processes, but fail dismally on the philosophy,” comments Blount; “That is like building a big fancy ship but with no anchor.
“Why are many managers so hard to differentiate? Well, they have vanilla, poorly-articulated belief systems at best and none at worst. The philosophy is a key anchor for when a manager’s performance is tested. If it is good, he will remain convinced in what he does and not capitulate to the current investment fad when his approach seems out of vogue.”
Interestingly, if you look at the truly successful managers in the long term in SA, they have very clearly articulated, logical and intellectually-appealing philosophies and they never waiver from those.
“The capitulation or chasing of current fads, fashions and popular investment themes can only doom you to long-term mediocre performance.” A great philosophy will lead to a consistent process from which the manager will never waiver. Clients know what they will always get from such a manager.

2. Passionate people
You want your manager to eat, sleep and drink investing. It’s amazing how many ‘investment professionals’ have no passion for what they do. It’s like backing an athlete who isn’t competitive. “Look your manager in the eye and see how hungry he is. Managing portfolios is not a nine-to-five job. It is no good thinking that you can cease to think of investments outside of regular working hours. In a globalised environment, markets are operating around the clock and investment managers need to be constantly aware of new developments and trends.”
Without a passion for the industry, a manager is unlikely to have the drive to be constantly informed. This may result in being reactive to market moves, rather than being proactive in anticipation of trends.

3. Owner managed
As a rule, the asset managers that outperform in the long term are owner managed.
On the other hand, investment managers who have outside shareholders tend to be good “asset gatherers” and have to meet external objectives such earnings growth and producing dividends. So they tend to focus more on creating profits for outside shareholders rather than their clients. Otherwise the investment team risks being fired. So it will do three things:
o gather more assets to earn more revenue, creating a proliferation of products;
o manage their portfolios in a risk-controlled peer cognisant approach i.e. don’t be too far from the crowd; and,
o begin focussing on short term performance and rankings rather than taking truly long term bets that require patience to pay off.
o In contrast, an owner-managed business means the CIO (often the founder and owner) would hardly fire himself if his business suffered a period of underperformance. “It gives them the luxury of not compromising and changing the style and philosophy nor focussing on short term time frames, and they don’t product proliferate, i.e. they stay focussed.

“Again it is no accident that owner-managed businesses in South Africa have been the long term out-performers. Cannon, Foord, Oasis and Allan Gray are examples of successful owner-managed asset managers.”
The manager does not need to become fixated on short-term performance – so-called ‘quarter-itis’ – in order to appease shareholders. The manager is therefore free to invest in the best possible way for long term results in line with the tenet of sound investment practice.

4. Sustainable and profitable
The investment industry is littered with the remains of start-up managers who have opened with a flourish, only to close several years later. Many of these have been based on a single large client, or a very small number of large ones.
A diversified client base is far more desirable from a business point of view, as the loss of one client is less likely to disrupt the company. Ideally, one would look for a manager who has a host of clients from a range of industries.

5. Patience
The wise investor has a long-term horizon and is not concerned with near-term performance. The whole business should be aligned with this thinking, in order to best serve the client’s needs. Both staff and shareholders need to share a similar focus to ensure that it delivers long term outperformance.
Clients, for their part, need to buy into a manager’s investment process and philosophy without concentrating on performance as the sole means of assessing a manager. If the process and philosophy are sound and are followed with rigour and consistency, the performance inevitably follows.

6. Investment team remuneration linked to results
By linking the team’s remuneration to the results they generate, their interests are directly aligned with those of the client. While this does not guarantee top performance, it serves to manage unnecessary risk taking and the team will focus on its core responsibility.

7. Size
While some large managers are successful, size is a disadvantage. Take the example of a large South African asset manager which boasts that it has R100bn under management. That means that if it wants to allocate 1% of its portfolio to a company, it will have to buy R1bn in shares. That means, for example, that it would have to buy 1/7th of Imperial, say. Clearly this really limits such a manager’s universe to the top 60 in SA in terms of flexible stock picking.
That means larger managers have to be sector and thematic rotators. Some can do this successfully but if you want a truly flexible stock picker, then you have to be smaller and more nimble.
 

Copyright © Insurance Times and Investments® Vol:22.2 1st February, 2009
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