For much of my career I have been involved in researching and recommending active fund managers; this process typically involves extensive due diligence including numerous face to face meetings. Whilst optically the types of interaction that take place in these meetings appear straightforward, the underlying dynamics are complex and have significant implications for the type of questions we might ask about a potential investment.
A major impediment to our ability to obtain useful information and insights in such situations is our, often overwhelming, desire to manage how we appear to others. We are prone to ask questions (or fail to ask them) because of how it may reflect on us, rather than because of the importance of the question itself. In a previous job, I was often accompanied to fund manager meetings by the CIO (my boss) and the firm’s own psychologist. My line of questioning was undoubtedly influenced by concerns about how I was being perceived by colleagues and also whether I had gained the respect of the fund manager that we were interviewing.
In terms of the ultimate goal of the meetings these issues were, of course, an irrelevance. Whilst striving to appear intelligent in front of others might be a rational action from a career development standpoint, it can lead to incomplete and ineffective questioning. I think there are two particularly problematic behaviours:
1) Asking questions to prove our competence:
There is nothing wrong with asking detailed, specific questions – they are an essential part of a thorough research process – however, there needs to be a purpose and you actually should be interested in hearing the answer. Impressing a fund manager with sophisticated questions does not mean that you are doing a good job of assessing their investment approach.
A major hurdle for fund manager research is that you are typically at an informational disadvantage – the individual or team you are researching knows more about the central topic than you (or they certainly should do). Testing the depth of a manager’s knowledge can be important provided it is relevant to their investment approach, but you should always be able to justify why you are asking a particular question. Don’t mistake a fund manager knowing the securities in which they invest for being a skilful investor.
2) Not asking questions to avoid appearing incompetent:
This is a more pernicious problem and can lead to significant investment mistakes – asking ‘simple’ or ‘dumb’ questions can be painful and bruising to your ego, it can feel as if you are making a claim to be the least informed person in the room. Although it is often hard to combat (particularly if you are relatively junior) you should attempt to ignore such feelings for a variety of reasons:
– Simple questions can be the most difficult to answer, particularly where complicated investment products are concerned. It is easy to become lost in the weeds of an investment strategy and forget core principles that can often be drawn out by unassuming questioning. Seemingly naïve enquiries can be both challenging and insightful (as any parent will attest).
– Other people in the room are probably interested in the answer. You are unlikely to be alone in wanting responses to simple queries, but you might be the only person willing to raise them. I have sat in numerous meetings during my career when a fund manager has used a technical term or a particular acronym which (on reflection) none of their interlocutors fully understood, yet nobody asked for clarification – presumably because we were each working on the assumption that we were the only ones in the room at a loss.
– Answering foundation questions is a solid discipline for any investor. A useful heuristic for us all is that if the essence of an investment approach cannot be distilled into elementary concepts, it is probably best avoided.
– If you fail to ask simple questions, there are likely to be significant gaps in your understanding about any given investment. Apart from the aforementioned perceived reputational issues, there is very little downside to this type of questioning – it doesn’t have to come at the expense of more detailed lines of enquiry.
It is important not to confuse a simplistic question with a bad one – asking an active fund manager about performance drivers over the last month is a simple question, but on almost all occasions a poor one. Effective yet simple questions are those that improve your understanding of how and why a strategy works, and clarify areas of complexity or uncertainty.
Although I have used the context of meetings with active fund managers, the issue of self-presentation and how it impacts the type of questions we ask is crucial across many domains. Whilst expertise around complex areas is rightly highly regarded, it is usually the simple things that define our success or failure. Take care to manage your investments rather than your image.