Poorly performing investments by fund managers can be more revealing than their successes when assessing investment skill according to an article in Towers Watson’s annual Global Investment Matters publication. It also explores the characteristics and traits shared by the world’s best investors including the ability to learn from mistakes, which Towers Watson suggests identifies truly successful investors. In the publication, it lists other important investment attributes such as a passion for investing; great self-belief, balanced with cynicism and self-doubt; a fierce intellect, a competitive nature; and a clear investment philosophy.
Craig Baker, global head of investment research at Towers Watson, said: “Getting inside the minds and hearts of managers requires understanding of the investment drivers and key issues for reaching investment decisions on selected investments. This requires detailed examination of the investments within the portfolio for any obvious inconsistencies with the process or investments which appear to contradict the process. It is important to recognise that mistakes are an inevitable consequence of taking risk where uncertainty exists and the identification of these mistakes in a portfolio, in the context of broader understanding of an investment manager, can be very helpful in determining the presence of genuine skill.”
Towers Watson says that to form a view of the investment skill a comprehensive understanding of the investment philosophy, process and the execution of the process must exist. The company suggests this is particularly complicated as differences of approach mean that the analytical framework applied to each manager and product must be flexible.
Craig Baker said: “History shows that luminaries such as Warren Buffett and Peter Lynch have very different investment strategies. However, they are united in their disciplined, patient and unemotional approach to investing. Emotions such as fear and greed make it impossible to navigate an ever-changing market environment and build long-term wealth. They prompt investors to behave irrationally and chase the popular manager or asset class, abandoning their long-term investment plans. Successful investors understand that crises and uncertainty will inevitably rock the markets. However, instead of making drastic changes to their investment plans they keep a cool head and better position themselves to benefit from long-term growth.”
Towers Watson says that successful investors are aware that building long-term wealth requires counter emotional investment which sees them resisting the temptation to follow the excitement that builds around out-performing investments. It suggests that patience is a key characteristic of great investors as this allows them to recognise that the value of an investment often asserts itself over the longer term.
Craig Baker said: “Effective investors are equipped with the strength of personality to resist hyperbole and often invest in less popular areas. They do not conform to popular market strategy and build teams of colleagues who will challenge their ideas and investment philosophies.”
Towers Watson asserts that selecting investment managers is made difficult because it is possible that a genuinely skilled manager may generate poor returns for an uncomfortably long time before their skill again manifests itself. It says that it is also probable that an unskilled manager will produce positive returns for multi-year periods.
Craig Baker said: “These challenges of finding investment skill all represent a material cost, which few firms are willing to bear. However the generation of excess returns by skilled managers is there for those who can and are prepared to persevere.”
Global Investment Matters is an annual publication covering topical investment issues and this year includes articles on:
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Passing the baton: Delegation in the changing pensions world
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Retirement at risk: How has the current economic climate changed things for the DC investor?
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Chasing tornadoes: What can tornado chasing teach us about managing financial risk?
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Assessing where funds’ current investment strategy sits in relation to sustainable investing.
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