Portfolio managers should be given more scope to make mistakes, rather than being paralysed into inaction by ‘career risk’, says Alleron Investment Management.
A good funds management business should be comfortable with short-term mistakes as long as they are managed well, says Alleron Investment Management chief executive Barry Littler.
Speaking to InvestorDaily, Mr Littler said boutique fund managers have a structural advantage over their institutional counterparts.
“Boutiques have got skin in the game and therefore we care about the long-term success – how we manage risk, and how we manage mistakes,” he said.
Alleron, which runs a 150/50 long-short Australian equities fund, was founded in 2004 by Mr Littler and Albert Hung as part of Westpac (then St George’s) Ascalon Capital Managers.
The business was later bought out by management and is run by a small team out of North Sydney.
“Boutique structures, by their very nature, are geared to accepting and managing short-term mistakes because it's a prerequisite to medium term success,” Mr Littler said.
If an investment idea is not working for Alleron in the short term, it is quickly exited – while the winners are allowed to run.
“I reward the team for managing a mistake properly as much as I get excited – and reward them – for having a successful investment. It's the two sides of the same coin,” Mr Littler said.
The average tenure for a portfolio manager at an institutional fund manager is typically between three and three-and-a-half years – but any successful investment process should have at least a five-year horizon, he said.
"[Within an institution] you've got time to make mistakes, but you very often haven't got time to show that those mistakes are the building block to future success – because before the future success comes you've already left,” Mr Littler said.
But, worst of all, portfolio managers within large organisations are not incentivised to take risks, he said.
“For the average institution it's very hard to deal with ongoing career risk. It's very difficult to have a structure that understands and accepts short-term mistakes at the individual career level,” Mr Littler said.
Alleron, by contrast is remarkably “comfortable” when it comes to individual mistakes, he said.
“If you get into [a particular stock] and you're wrong you get out – but what you're looking for is the big winner that pays for several mistakes,” Mr Littler said.
“And psychologically you should be inclined to get in – because it's taking you one step further to success,” he said.
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