The manager selection process for asset owners such as superannuation funds is obsessively focused on past performance rather than skill, according to industry consultant Willis Towers Watson.
That is the assessment of the consultant’s London-based head of global equity manager research, Fabio Cecutto, who sat down with InvestorDaily recently.
So how does one go about assessing equity manager skill, if not through short-to-medium term performance?
Mr Cecutto says one of the most important indicators of skill is a strongly embedded investment process that is “different from the crowd”.
“What we look for is managers who have a sustainable competitive advantage, as well as a culture that encourages that competitive advantage,” he said.
“It often boils down to managers that are able and willing to think of the world in a different way, and very willing to back their own ideas in substantial ways. It’s both the thinking and the culture,” he said.
Importantly, a good process will trump outcomes – at least in the short to medium term, he said.
“If you only judge people by the outcome, they could be lucky. The question is: how repeatable is the process?” he asked.
Willis Towers Watson typically finds that its institutional clients get “bogged down” with manager monitoring and end up replacing one manager with another.
“There is so much focus on ‘Manager ABC has underperformed for the past three years. Let’s replace them’,” Mr Cecutto said.
“You cannot do that … it’s almost like you’re handicapped. Yes, you can be lucky and you can get a few managers that work out, but on average, net of fees, it will be tough to deliver outperformance at the overall portfolio level,” he said.
Willis Towers Watson prefers equity portfolios that are assembled using managers that are very different from the benchmark, very concentrated, and typically long-term in their outlook and execution.
“So what you need to do is you have to create a robust portfolio that combines different managers with different skillsets and geographies,” Mr Cecutto said.
