Curiosity, Tenacity and Integrity
Skerritts View October - 2017
When asked recently what she considered to be the most important characteristics that made a successful fund manager, Anne Richards (Chief Executive of M&G Investments) stated, “curiosity, tenacity and integrity.” That got us thinking a lot about these qualities and how they reflect upon how we run money and we tend to agree that she is spot on in her assessment.
Integrity should be a given, but it is very hard to measure. It is defined as being “the quality of being honest and having strong moral principles”. We find that having our own, families’ and colleagues’ money in the mandates that we run of huge benefit in measuring our integrity because, in simple terms, we can not, nor would not, invest in something for clients and investors that we would not invest in for ourselves. The fact that we run our portfolios along tactical, rather than benchmarked, lines helps in this regard because we do not have to invest in something because we are told to by some modelling tool. This is not to suggest that managers of funds that follow benchmarks lack integrity – far from it – but it does help us to maintain our own standards. Our mistakes are our own!
Which leads to tenacity; defined as “the quality or fact of being very determined”. We would never claim to be infallible, so when we make a mistake, we are determined to put it right. This is easier if the impact of any mistakes that are made is contained, and so we follow the principle of minimising our maximum regret. It’s far more comfortable to avoid making mistakes in the first place, but if something doesn’t work out the way it was intended, diversification of assets is vital in reducing the overall impact of a non-performing holding. We therefore try to avoid concentration risk and illiquidity at all costs. What begins as a good idea can very quickly turn into a bad one (particularly in an uncertain environment such as the one that we are going through at present) so it is essential that we are able to change our minds immediately, and without constraint.
Tenacity also comes to the fore because we are determined to do the best that we can, and consequently to be the best in our field. It always surprises us to hear fund managers saying that they don’t aim to be in the top quartile of their sector. Why wouldn’t you aim for that? Again, running our own and loved ones’ money helps with our aim because if we can lose less during the inevitable bad times that come along intermittently, yet participate in the good times as well, we will naturally rise towards the top end of comparable investments out there on a consistent basis.
So while integrity and tenacity are in some way linked, and may be expected to some extent by investors in a fund, we think that it is curiosity that sets the best apart from the average.
Curiosity is defined as “a strong desire to know or learn something”. As fund managers, we love learning new things, trying to adjust our thinking to the changing world that we are in. We never stop learning, because we never stop asking questions of others. This is perhaps why so many fund managers, politicians, central bankers, economists and strategists are finding it so hard to adjust to life since 2008. Because of their status, they think that their role is to tell others what to do based on what they have learned. The trouble is, what they learned no longer applies to the world in which they are currently barking their orders. The world since 2008 and the Financial Crisis is one of low inflation, low interest rates and low bond yields, yet we still hear the phrase “normalisation” being bandied about by those who have not adjusted to today’s new normal which is, after all, nearly ten years old now. They are still living in their pre-2008 “normal” world of high inflation, high interest rates and high expectations all born from a twenty year credit binge that kept everyone afloat.
The old order needs to break before the new is built, and we’re in the process of building the new now. The new order sees a changing geopolitical dynamic with the decline of the US, the emergence of China, the rediscovery of nationalism in Russia and a shifting European landscape. The world of the central banks resembles Game of Thrones with new faces due to be in situ this time next year at all of the major “dynasties”, including the Federal Reserve, the ECB, the Bank of Japan and the People’s Bank of China.
We’re constantly trying to learn what this may all mean for our investors. We try to take a different approach to the traditional habit that investors have of trying to predict the future. Instead of asking questions such as “when is the next global recession?” we turn it around and ask ourselves that, if we are sitting here in two years’ time amidst a global recession, what are the factors that would have caused it? In this way we attempt to see threats to the norm before they get a grip, which hopefully leads to less reactive management of the funds that we manage in favour of an anticipatory approach. In this way we hope that curiosity kills the catastrophe before it can get to our portfolios.
“Knowledge is of no value unless you put it into practice”
The above words of wisdom were given to us by Anton Chekov, and our pursuit of knowledge is reflected in the portfolios that we run. Our questioning has led us to draw the conclusion that, in today’s world, it makes more sense to invest in sectors rather than along the geographic lines favoured by the majority, still. We aim to identify longer term structural growth trends such as robotics and automation, cyber security and an ageing population, caring less where the companies in which we invest as a consequence are situated. We don’t ignore geography however if it is linked to a theme. For example, earlier this year we identified the elections across Europe as being highly likely to be “red herrings” in terms of risk, and invested heavily in European smaller companies in order to participate in the opportunities that this presented. Sadly, North Korea has now become a theme in its own right which we have attempted to address by introducing physical gold back into portfolios.
This piece did not start out with the intention of mentioning the active versus passive debate that swills daily around the investment community, but the subject matter does raise an interesting point. We, as fund managers, use passive funds. They are a very useful tool, particularly when trying to access new sectors. However, we have yet to find any passive funds which are run along the lines of any semblance of curiosity, tenacity or integrity. A passive fund is quite simply a parcel of assets in which the investor invests in everything (within the relevant index that the passive is following).
The growing army of investors who invest purely on the basis of cost are, in a way, potential victims of the new order, because their experience is as flawed as those who are anchored in their pre-2008 world. Since then, everything has gone up without any prolonged period of price reversals, so their “experience” tells them that cheap is best. In constantly rising markets they are probably right. As sure as day follows night there will be a bear market at some point in the future and our natural curiosity leads us to ask the question; if, three years from now, we are one year into a bear market, what will be the reaction to the realisation that you can lose a third of your money very quickly as well as very cheaply?
One would hope that the curiosity, tenacity and integrity of a good active manager may steer you through the anxiety more effectively. Time will tell.
The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Adviser.
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