Nick Kirrage of Pieria recently wrote about portfolio manager tenure—a key data point for many advisors when selecting a fund. This data happened to be for the UK, but I suspect that the data would be similar for the U.S.
When it comes to evaluating funds, just how important a consideration is fund manager tenure – that is to say, the length of time somebody has been at the helm of a particular portfolio? It is a question that crops up with a fair degree of frequency – including at a recent investment conference organised by Citywire and at which we were speaking.
An electronic voting system enabled the audience of UK-based financial advisers to express their thoughts on the matter and the overriding view turned out to be that, yes, fund manager tenure was a very important consideration. It also emerged that the audience members themselves had averaged around two decades of experience as financial advisers so how did fund managers do by comparison?
Not great, would be the short answer while the slightly longer one can be seen in the chart below. It plots, courtesy of data Citywire holds on its universe of 17,000-odd funds, the experience levels of fund managers – from the 91.1% who can boast a whole 12 months in charge of a portfolio to the 1.1% able to match the 20 years or so averaged by that audience of advisers.
It is striking how steep the drop-off rate becomes over time, with under a fifth of fund managers surviving to celebrate their tenth anniversary. This has to play on some managers’ minds and may help to explain the index-hugging and consensus views so often seen in investment. Unfortunately, doing what is right by your investors is not always consistent with doing what might keep you in your job.
It is often said that “financial products are sold, not bought.” In other words, very few individual investors wake up one morning and say to themselves, “Today, I am going to buy a global tactical asset allocation strategy.” They may wake up knowing that they would like to see their money grow and risk management is very important to them, but in terms of selecting a product to help them achieve that objective they usually don’t have any idea of how to go about selecting a particular strategy. Of course, that is why there are financial advisors. However, what the above data on manager tenure reveals is that the rationale that was used by an advisor and an individual client to select a given investment fund in the first place may only hold true for a very short period of time. Most portfolio managers have a given approach to managing a particular strategy. For example, if the portfolio manger considers himself to be a “value manager,” what are the chances that there will be consistency in investment strategy for the fund when/if that portfolio manager decides to take a different job? Even if the manager stays with the fund for a long period of time, what are the chances that the same investment process employed today will be the same process employed in five years? Surely another function of a good financial advisor is to stay on top of the strategies being used for their clients and to make changes in managers when they deem necessary. However, the reality is that the manager/investment strategy employed at a given fund may be constantly changing. I don’t think most investors have much awareness of that fact.
These are among the very reasons that at Dorsey Wright we place such emphasis on process, consistency, and on building and executing rules-based models. If someone were to ask me how the investment process for our Systematic RS International portfolio has changed since it was launched in April of 2006, the answer would be that nothing has changed. Same for PDP, PIE, and PIZ and other investment strategies that we manage. In full disclosure, very occasionally we will uncover something in our testing that we believe will result in meaningful improvement in the strategy and we reserve the right to make such a change. Additionally, the line-up of guided ETF models (available at www.dorseywright.com) offer advisors a repeatable process for managing a client’s money.
Every advisor in this business is in competition for assets. Educating clients and prospects about the systematic nature of the Dorsey Wright investment methodology can go a long ways towards helping you set yourselves apart from the competition. Of course, we are not the only investment manager that employs a systematic investment process (think about the array of Smart Beta strategies). But the larger point should be clear, consistency is a not a commodity in ample supply and yet it just may be among the most important considerations for any strategy.
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