Company resilience is now on investor agendas: some big companies have proved remarkably fragile. Few investors expected specific preparedness for a pandemic, but broader questions have been raised about the sustainability of earnings. Excessive dividends and misdirected executive rewards seem to be factors in current problems, along with share buybacks and aggressive risky corporate strategies. But might it be time to turn the spotlight on fund managers themselves? How resilient are investment professionals in the face of market reversals and performance setbacks?
Key to building an investment career and long term track record is navigating periods of disappointment. Survival involves overcoming stress, and the ability to self-examine. While organisational infrastructure and team support can help, ultimately individuals bear much of the pressure. Leading a high profile team can be as lonely as working as an individual ‘star’ manager, even with a deputy. How can fund selectors and clients evaluate the risks? Although a large investment group can readily switch the managers assigned to a fund, that can involve disruption to strategy and a voyage into the unknown for clients. A portfolio upheaval, with lots of stock trading. There will be less risk and cost if an individual can stay at the helm in turbulent markets and turnaround performance. Clients need clues to the character and skill required for this.
Stock in trade for investment professionals is the story. Typically there is a narrative for clients in volatile markets, and another one that managers tell themselves. Personal narratives are not usually a bad thing – everyone needs to be able to make sense of their own successes and failures, and try to weave their experiences into something consistent. It is usually personal and hidden, but over time clients will get glimpses from a manager - whether it involves humility, learning from experience, and consistent ethical behaviour. It may take time and a number of meetings to see this. Equally, while successful managers often have larger-than-life egos, over-confidence can be disastrous, particularly in adversity. When the rules of the game change is exactly the time that learning and judgement really matter.
What clients can see are the public pronouncements and investment updates. Here can be subtle danger signals. What does it mean to talk of a bear market rally – apparently now consensus? Or parse the performance in idiosyncratic and self-serving ways? Some value managers, for example - barely six months into the year - talk of a bounce since mid-May as a new trend. And just four months into the crisis, some growth managers see v-shaped stock rebounds as full justification for an unchanged portfolio. Records built on stockpicking should not morph into a macro call. Equally, it now looks like some ‘absolute return’ funds were little more than a market bet.
What clients want to see is transparency and candour from their manager; renewing stock analysis, challenging assumptions and managing risk. A degree of risk reduction while new information is assessed may be merited. But research on typical manager behaviour under pressure points to unexplained changes in risk profile, and often the language of denial and short term focus. Recent years have thrown up a few examples of this from ‘star’ managers; the pandemic is revealing many more. Statements from a manager should be examined for consistency and insight, not confidence.
Client consistency of expectations can help calm a manager. Although a mild level of anxiety can be an antidote to overconfidence and support good decision-making, high levels of stress do not make for good decisions. It is too easy for managers to try to second-guess client aims, and problems are then compounded. At the very time when a usually thoughtful and pragmatic manager should be questioning his own judgement, clients may be demanding that he reassure them and demonstrate confidence.
Resilience matters, but not all investment managers have it within themselves to react well in adversity. That is when emotional support is key. Clients should look in the stories for signs that stress might be driving riskier behaviour.
A version of this article was published on Citywire.co.uk on 24/06/2020.