Managing the managers
PUBLISHED ON FEBRUARY 2021
Research, research, research. It really does pay to focus your time on analysing the potential pitfalls of any opportunity before making a decision, as any investor worth their salt will know. While the stock market world is known for high stakes buying and selling which depends on a deep understanding of companies, the same level of care and due diligence should be paid when it comes to picking an investment manager. Looking under the bonnet at a manager’s investment philosophy and examining how this translates into a portfolio of assets is important to know if they align with your goals and beliefs.
As the appointed investment manager of Alliance Trust, an investment company with a history stretching back more than 130 years, Willis Towers Watson is responsible for the day-to-day management of its global equity portfolio. Since 2017 it has been a multi-manager portfolio and currently has eight separate stock pickers contributing a selection of their ‘best idea’ stock picks to a single portfolio. A key part of the role in managing this portfolio is in deciding which managers to enlist and ensuring a balance between investment styles, sectors and geographies. With some £3bn of assets under management, this is no small task. We are well aware of the weight of the responsibility in choosing the very best managers on behalf of shareholders.
Our work at a more institutional level does however hold many lessons that can be applied by any investor examining any manager they hold in a portfolio. So, how do we do it?
Finding a competitive advantage
When picking any manager to pick stocks for the Alliance Trust portfolio, we start by examining the calibre of the people, look for evidence of a spark or a competitive advantage in the way the team generates investment ideas, and the effectiveness of the manager at turning mere ideas into a successful and growing portfolio. Does that team have the skill set to match the ambitions of the investment philosophy? How are they different to other managers?
Much of the consideration involves hard facts – things we can quantify as a team and place a value on. For example, how is performance? What risk processes are in place? How is the portfolio constructed? However, the softer, more qualitative considerations such as the culture of an organisation and how staff are treated are equally, if not more, important.
The quality factor
Qualitative considerations can uncover a different sort of issue. Does the organisation have a high level of historical staff turnover? If so, does this indicate that there is a risk the team we enlist could leave? A stable team with a long-term view is a crucial component of any investment strategy. Examining the corporate culture and other mechanisms in place to help retain people is important.
We also look for evidence that the interests of both the firm and the team are aligned with clients via well-structured fees, importantly examining whether the fees are too high, as well as the level of co-investment - does the team invest their own money into the strategy they run?
It is also important to assess where the manager will fit in the wider portfolio, and what they bring to the table. In 2019, Alliance Trust took the decision to appoint an additional stock picker to its roster, US-based Vulcan Value Partners. We had known CT Fitzpatrick, VVP’s founder, for a long time, and liked VVP and their approach to investing, however their funds were closed to new investment. Once it reopened, it offered WTW an opportunity to invest. With a focus on seeking out strong value opportunities, which added a different source of active return to the portfolio. In particular, it gave the Willis Towers Watson investment team more flexibility to manage the overall exposure to the US, which accounts for 50% of global equity markets.
Sustainability in focus
An area of increasing concern for many investors, including the team at Alliance Trust and Willis Towers Watson, is that of sustainability and environmental, social and governance (ESG) considerations. To assess a manager’s commitment to sustainability we look for a demonstration of a process that identifies and assesses material ESG factors such as carbon emissions, or an analysis of corporate governance, which can prove if a manager’s process aligns with our own aims and culture. An important, but often-overlooked, area of ESG and sustainability is that of stewardship. This involves examining a manager’s process on shareholder voting and how they engage with companies in which they invest to protect and enhance the long-term value of their holding. Engagement is crucial to ensure firms are being held to account in terms of both their financial and ESG commitments and should be something a strong investment manager is well equipped to take on.
Asking the right questions
While Willis Towers Watson works within a universe made up of many thousands of funds and managers, the process of questioning and examining an investment strategy when deciding where to invest can be applied at every level. When building and managing an investment portfolio, having the confidence to examine a manager in full means you are better able to adjust should something change either with a manager, or on a wider social or economic level. Research really is key and will help ensure an investment portfolio is well placed to navigate the vagaries of markets and the wider, ever changing global landscape.
