Several anecdotes about “failed” fund managers revealed at the Future Generation investment forum in Sydney on Tuesday say a lot about what two legends of the market believe makes a successful fund manager.
During a panel discussion, moderated by Chanticleer, Wilson Asset Management founder Geoff Wilson and Paradice Investment Management founder David Paradice were asked the question: what makes a good fund manager?
Paradice said he had learnt a lot about what makes a good fundie from the recruitment of a lot of people over the past 30 years working in equity investment.
“The best fund managers are guys who are generalists who work in small teams, which flies in the face of some of the bigger US groups,” he said.
“I find that when you have a small team of people, they are much more accountable for stocks in the portfolios and they tend to work a lot better.
Paradice said his view on the need for generalists rather than specialists was confirmed many years ago when he employed a former stockbroker who was an expert in financial services, energy and retail.
He said when the two of them travelled to Perth for some meetings he looked around while in the plane and saw his portfolio manager reading a “junky newspaper”.
“What happened was the portfolio started to go towards financial services and retail, which were his areas of expertise. So, during the GFC he went and wanted to buy 3 per cent of Rams Home Loans and I put a stop to that and he halved the investment.
“Then he wanted to buy some more and we had our general portfolio meeting where we discussed which stocks we should buy. He said I want to double this position and it was because his focus was solely on financial services.
“Of course, I said we are not buying any more. We had a discussion after the meeting and I said I don’t think you belong here.
“It’s about being a generalist and being able to look at any particular sector and find out what’s cheap.”
Earlier, Paradice told Chanticleer that good fund managers were people “who wanted to have a go” and they “don’t want to necessarily get paid truckloads”.
He said the Future Generation Investment Company and the Future Generation Global Investment Company had a preference for choosing boutiques because fund managers who were owners of the business had much greater engagement in the investment process than salaried employees at a big fund manager.
The two Future Generation funds employ fund managers on a pro-bono basis and then the funds donate the 1 per cent annual fee that would have gone to the fundies to a range of charities.
“We had a young guy who worked with us and we were trying to work out if he was passionate because the boutique guys are passionate about what they do,” he said.
“We had a similar situation with a guy, a young guy working for us, who was on the ferry reading his book. Someone reported that back to me.
“He does not work for us any more. He came into the office one morning and said what about this, which was on the front page of the Fin Review and he had not even seen it. He was just not passionate about what he did.”
Graham Hay, a deputy portfolio manager and investment analyst at AntipodesPartners, said the problem with large institution-owned fund managers was that “career risk tends to overwhelm portfolio risk at the most critical time in markets”.
Hay said a US study of fund managers’ performance over multi-decade time frames showed that the guys with top decile performance spent at least one period of three years in the bottom quartile and at least one year in the bottom decile.
“You have got to have the stomach and the institutional settings to carry on when times are tough and that’s not easy,” he said.