LIPPER-Toil triumphs over talent for ‘star’ fund managers
The tumult caused by Richard Buxton’s move from Schroders to Old Mutual in March highlighted the veneration of “star” fund managers, those select few who apparently rise above the crowd to shine their light upon adoring investors.
We don’t need to dwell on Buxton’s track record (annualised return on his UK Alpha Plus fund of 13.7 percent over 10 years), but combined with Mark Lyttleton’s departure from BlackRock – his own star rather faded of late – I am drawn to ponder the funds industry’s views of, and hunger for, stellar talent.
It is attractive, and reassuring even, to believe that the people running our money are blessed with some innate skill for playing the markets, but I recently had to re-consider my own views on natural talent when talking to Matthew Syed, now a journalist and author, but previously England’s number 1 table tennis player for a decade. A competitor at two Olympic Games and winner of three Commonwealth Gold medals, Syed has some experience of being praised for his apparent natural ability.
He contends that some of our most cherished notions about natural talent are misplaced. Instead he argues persuasively that practice, opportunity and belief are far more important than genetics in determining success.
In a nutshell, Syed asserts that “when you look at the science rather than our own implicit biases, you arrive at the conclusion that champions are not born, they are made.”
Rather than going through these arguments in full, which Syed does best himself in his book ‘Bounce’, I will focus on a few aspects that have direct relevance for the funds industry and the cult of the star manager.
Exposure to the right opportunities is obviously vital for an Olympic athlete or a top fund manager to succeed, but Syed’s most consistent theme is a simple one: practice.
Not hard work for building character, or for some other honourable good, but because purposeful practice is far more influential in determining an individual’s success than a reliance on genes. “Those who believe in talent tend to lose motivation. Why work hard if it is all about having the right genes?”
Commodities guru Jim Rogers’ recent comments on his own experience are interesting here. “To the extent that I had any success, it was from homework,” he said. “I was willing and able to work harder than other people, but I was also willing and able to think differently from other people.”
Of course Syed’s emphasis on practice over talent does not mean that he believes effort alone guarantees success. The right mentor – perhaps the right investment manager – to learn from is vital. Intertwined with hard work is the often discomforting task of learning from feedback.
This has the potential to be a huge issue for star managers if the culture in their company is not conducive to giving (or receiving) constructive feedback, or to “think differently from other people,” in Rogers’ words. Not having your ideas challenged by colleagues, or believing your own billboard ads, is surely a slippery slope for a star fund manager.
As Syed puts it, “For those who are already ahead of the pack, it is vital they are pushed. If they stay within their comfort zone, they will not learn.”
The perils of lacking feedback, of not continuing to learn, can be seen in a striking example that Syed offers of research by Jeffrey Butterworth in 1960. This examined the ability of doctors to make diagnoses using heart sounds and murmurs over time. He found that while accuracy increases with experience as a person progresses from student to certified cardiologist, he also found that accuracy actually diminishes over time for doctors in general practice.
The explanation for this apparently surprising finding? GPs encounter cardiac cases relatively infrequently, and they have relatively limited feedback on which to base their judgments and diagnoses. How to improve? Well, after short, targeted practice, “their diagnostic accuracy soared,” says Syed.
This suggests a parallel with fund managers diagnosing, and dealing with, financial crises – even rarer than heart complaints, but also with devastating consequences. In turn it would be interesting to delve into the planning fund managers undertake for dealing with future crises of different shapes and sizes.
There is some evidence that fund managers have already learned to use their experience effectively. Analysing mutual funds registered for sale in the UK in preparation for this year’s Lipper Fund Awards, we compared winning funds against their peers and found that the average tenure of the winning fund managers is longer than the rest. From this initial examination the evidence was pretty consistent, suggesting that the fund management community may actually be a good example of practice in action – and of seeing experience make its mark.
Building success over the long term brings us to another aspect to consider, and something someone like Jim Rogers has in abundance: belief. Any individual has to be motivated enough by their profession to persevere with the hard work needed to succeed.
There are many extraordinary examples of the scale of hard work undertaken from an early age. Mozart had clocked up 3,500 hours of music practice before his sixth birthday, according to Michael Howe (‘Genius Explained’, 1999), while Geoff Colvin (‘Talent is Overrated’, 2008) estimates that Japanese ice skater Shizuka Arakawa fell over 20,000 times while practising her skating (starting at the age of five), but ultimately won an Olympic gold medal in 2006.
As Syed puts it, “When you appreciate that it has taken many thousands of baby steps by world-class performers to get to the top, their skills do not seem quite so mystical after all.”
This highlights the need for perseverance, underpinned by a real belief in what one is practising and trying to achieve. As the statistics above illustrate, the sheer volume of work involved in reaching the highest levels of performance is difficult for outsiders to comprehend.
But this also hints at a classic conundrum for the fund management industry. Mutual funds are designed as long-term investments, but investors often buy and sell them far quicker if they do not think returns have been good enough over shorter periods. “Baby steps” can be too small or too slow for many investors.
To a certain extent this simply underlines some of the pressures that asset managers have to deal with. But taking this aspect together with the others from Syed, one finds a well-rounded case for fund businesses to build structures which give opportunities to those willing to work hard, provide constructive feedback throughout the organisation, and create a company culture that really motivates people.
Before ending, the number cruncher in me cannot help but ask Syed about those who practised hard but failed. Is there a survivorship bias in the statistical evidence?
“I am glad to say that I found no evidence of this,” he says. “With deliberate and purposeful practice, we are all transformed with dramatic implications.”
Encouragement then even for those less-than-starry fund managers currently languishing at the bottom of the league tables.