When talking to active managers, fund investors can focus on the wrong things – we are heavily biased toward the short-term, and obsess over issues that are recent and salient.  We also drastically overvalue confidence as a characteristic, whilst punishing circumspection, realism and humility.  Given this, it is unsurprising that conversations with active managers are often shaped in a manner that is entirely at odds with the capricious and unpredictable nature of financial markets, and do little to help identify skill.

Active managers inevitably attempt to present themselves in the manner that they believe most appeals to investors and there are, therefore, many things that they should say, but rarely do.  Here are some examples:

“It was a genuine mistake – our analysis was incorrect, but I will make sure I learn from this for future decisions.”

“Whilst I believe in this investment, given that I will get at least 40% of my decisions wrong (assuming I do a very good job), this could be such an occasion.”

“It is important to highlight the pronounced style tailwind that I have enjoyed during this period of outperformance”.

“I can’t confidently predict the outcome of this event and, even if I could, it would be difficult to gauge how markets would react”.

“Although the trade was profitable, the situation did not develop as I had imagined and its success was actually just a dose of good fortune”

“Whilst the event is material and may have significant ramifications for markets I just don’t know what these will be with any certainty, so have decided to do nothing”.

“I appreciate that recent market volatility feels significant, but I don’t want to focus on it because, on a ten year view, it is likely to seem meaningless”.

“I am happy to give my perspective on the macro environment, but I have no particular expertise in the area, certainly relative to the thousands of others opining on the same subject”

“Of course I can review three month performance, but the results are almost entirely random market noise”

“I appreciate that I previously held a high level of confidence in this view, but, after careful analysis of new evidence, I realised that I was wrong”.

“I have absolutely no idea what equity markets will do over the next 12 months, but the odds are in favour of them going up”.

“I am fully aware of our propensity to make behavioural mistakes, and this is how I aim to minimise them…”

“On the balance of probabilities…”