If you are a staunch advocate of index funds then the answer to the question of whether meeting active fund managers before investing with them is a waste of time is unequivocally yes. So, to avoid another active versus passive debate, let’s assume we have to invest in an active fund – is meeting with the fund manager necessary and does it improve the odds of success? During my all too long career fund manager meetings have been something of a sacred cow – of course you must see the ‘whites of their eyes’ before handing a fund manager your money, it would be madness not to. But is this true?
The received wisdom around the value of meeting fund managers is so pervasive that I have rarely seen any alternatives proposed – aside from the occasional and dreadful performance (chasing) fund screen. Of course, different people have different approaches to such meetings – some are happy to simply be presented to, while others prefer to grill a junior analyst on their forecast for operating margins in the smallest stock in the portfolio – but most seem to miss a critical factor. Whenever we enter into an interaction with another individual the decision we make will often be overwhelmed by a range of unconscious behavioural factors. We ignore these at our peril.
What are the main behavioural problems we are likely to encounter when meeting with a fund manager?
Halo effect – Perhaps the most challenging behavioural issue of fund manager meetings is the halo effect. This is where we allow a positive view of one aspect of an individual to impact our assessment of an unrelated trait. A fund manager is a compelling, articulate presenter – surely, they must also be a good investor?
Outcome bias – Even though past performance is a poor guide to future returns and the presence of skill; we are likely to find the answers of an outperforming fund manager persuasive and an underperforming manager weak. In this sense, fund manager meetings can serve to perpetuate destructive performance chasing behaviour.
Selection bias – Successful fund managers who raise assets are likely to be good presenters and confident communicators. It will have helped them through every stage of their career. The bad presenters are probably more interesting propositions – they have had the odds stacked against them in getting to where they are.
Reading people – Part of the appeal of meeting fund managers is to gauge whether they are trustworthy and credible. Yet most of us hugely overstate our ability to ‘read people’, understand their motives and separate fact from fiction.
Perpetuating tropes – We inevitably hold a range of misguided archetypes and tropes about what characteristics individuals in certain roles should possess. One of the reasons why so many fund managers are men (aside from deeply-ingrained societal issues) is that we are beguiled by gendered traits such as overconfidence and charisma – despite them being unrelated to being a successful investor. These traits are often well in evidence in traditional fund manager meetings.
People we like – Although it is difficult to accept, we will hold more favourable views of investors that we like as people.
Reciprocity – Another issue that we struggle to believe would influence us is the power of reciprocity. If someone does something for us, we feel compelled to return the favour, often in ways that are entirely incommensurate. Small gestures can have a huge impact and is a spectre that looms over relationships fund investors may have with asset managers.
Charisma – Charisma hides a huge number of ills and a fund manager meeting is the perfect forum to mask a lack of competence with personality. There is nothing more dangerous to an investor than a lucky fund manager with charisma.
Information / confidence – There is often a conflation between the depth of research undertaken on a fund manager (“we have had 15 meetings with them”) and the quality of the resulting decision. There are two problems here. First, we can easily lose sight of what variables matter because we are subsumed by irrelevant detail. Second, past a certain point, more knowledge simply leads us to hold more confidence in our view without it becoming any more accurate. In this situation, increased information reduces decision quality.
Information asymmetry – Inherent in the interaction in a fund manager meeting is an information asymmetry. The fund manager should know more about the securities they invest in than we do. Yet I have attended countless meetings where a view on a fund manager is formed based on how well they ‘know their stocks’. Unfortunately, rote knowledge of securities is not a necessary or sufficient condition for being a successful investor.
Storytelling – An effective fund manager meeting (from the perspective of a fund manager) is an exercise in storytelling. It is designed to make us focus on the inside view at the expense of the outside view – that is to concentrate on the specifics of the fund manager in question, not the general probabilities attached to successfully finding a skilful active fund manager. “Who cares if the odds are 1 in a 100, that was a great meeting”.
Sunk costs – In a fund manager due diligence process, we must always be aware of the impact of sunk costs. Turning back or changing our minds after so many hours spent in meetings is a difficult thing to justify to ourselves and others.
Front stage / back stage – One approach some fund selectors take when assessing a fund manager is to observe team meetings to see how interactions take place and decisions are made first hand. This is viewed with scepticism by many who argue that if a team are being watched then it is not a genuine interaction. Yet these same critics are often happy to sit in a standard fund manager meeting, which is surely more artificial. The simple fact is that – as sociologist Erving Goffman noted – we all have a front stage and a backstage self. The waiter in a restaurant behaves differently when they are serving us to when they are in the kitchen. All fund manager meetings are performative, and we will never know the true functioning of a team unless we work at the organisation.
Management of self – It is not just the fund manager that performs in a meeting, it is the fund selector also. They might be in awe of the fund manager, who will often have more money and power than they do. They might even be in the meeting alongside their own boss or client. The temptation is often strong to ask questions that might reflect well on them, rather than those that help make a good decision. ‘Intelligent’ but empty questions are easily favoured over ‘simple’ but searching ones.
A problem for other people – There is one overarching factor that amplifies the damage caused by behavioural issues and that is our ingrained belief that they don’t affect us: “Other people? Maybe. But they have never influenced my decisions.” Until we accept that they do, it will continue to undermine the effectiveness of fund manager meetings.
The regard in which fund manager meetings are held is such that I have never heard any reasonable alternatives proposed, indeed suggesting such things might be regarded as heresy. But let’s try.
How about instead of a face-to-face meeting with a fund manager, we reserve time with them and ask them to respond to a set of bespoke questions by hand. They have to do it themselves and on their own. If we were assessing a group of fund managers, we could even blind the responses.
I can hear the howls of protest about the loss inherent in such a method. There has, however, been such little progress in this area nor acknowledgement of the behavioural pitfalls of the current approach that fresh ideas are needed.
One less controversial method to help enhance the value of fund manager meetings is simply for fund investors to be clear about what it is they care about. It is so easy to become lost in a sea of noise. The most effective way to alight on this is to ask ourselves – if I could only know ten things about a fund manager before investing with them, what would they be?
It is not simple to define, but can lead to a much sharper focus. Having an agenda is not enough, we need to be trained on what matters and why.
Would I want to invest money without meeting a manager? Probably not, but perhaps it is just because I have been conditioned to believe it is essential. What is critical is that fund manager meetings are based on evidence pertaining to the factors that we believe are important. We should also always be underweighting what is said and overweighting what is done.
Are fund manager meetings a waste of time? No. Is it a waste of time or worse if we don’t acknowledge or deal with the behavioural biases that we carry with us into those meetings? Almost certainly.
My first book has just been published! The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).
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