When institutional investors are picking active managers – whether or not they have asset consultants or other advisers involved – it’s all about confidence and judgement, according to new research. Quantitative analyses “are just tools”.
The research, presented last Friday at a lunch organized by the Investment Innovation Institute (i3), followed a study of the behavior and views of the senior investment staff of 10 large superannuation funds in their selection process for active equities managers. The researchers were Geoff Warren, a senior lecturer at ANU and former asset consultant, and Doug Foster, professor of finance at UTS.
Warren said: “Judgement dominates the decision. The key message is: the confidence in and the evaluation of the people and their capabilities. Key words (from the interviews) were: confidence, conviction, trust and faith.”
None of the 10 funds represented saw the choice in whether to go active or passive with broad market equities as an “either/or” choice. Eight of the funds had both strategies.
“We encountered a belief in active but it was not dogmatic,” Warren said during his presentation. “The reasons for using active managers are only vaguely related to the performance of the average manager.”
He felt that researchers were often “barking up the wrong tree”.
The way the question was framed may influence the answer, he observed. Their pertinent question was: “Can I identify a small group of active managers and form them into a portfolio?” The two considerations were whether there was a perceived capacity to identify skilled managers and whether there were other benefits from going active, such as inefficiencies and biases among the major indices.
Asked whether he believed funds and/or consultants had the ability to add value through manager selection, he responded: “Personally, I think the skills are not broadly spread. It’s the same as with stocks. Some managers can outperform through stock selection. Similarly, some funds can identify good managers. But some cannot and should probably not do it.”
With respect to manager terminations, Warren said there was always a combination of reasons, but there was “zero tolerance” for a manager not complying with the mandate. Capacity was a consideration but this was inconsistent.
On fees he said all the funds were worried about them and tried to negotiate them down, but fees rarely dominated the decision as to whether to hire a manager.
The lunch for about 40 investors and fund managers was hosted by Perpetual Investments’ new executive director, Michael Gordon, who returned to the position in Australia last month after a long stint in the UK with Fidelity and BNP Paribas.
Teik Heng Tan, principal of i3, said the lunch was the first in a series aimed at continuing the dialogue which occurred at his company’s conferences.
The full paper is available here: http://www.i3-invest.com/viewnews.php?news_id=3