Andriette Theron, Head of research at PPS Investments
As a multi-manager, we spend substantial resources on researching, screening, selecting and blending managers with complementary strengths into our fund range. But the process is ongoing and, on occasion, we carefully consider making a change to managers previously selected, particularly if it could enhance the return profile and improve the chances of achieving the desired outcome.
Our approach is to replace managers when we no longer think they are better than average. This means that above-average specialist managers should outperform their market benchmarks, while above-average multi-asset managers need to outperform their peers.
In manager selection, the first step is to identify the managers that would be suitable for inclusion by quantitative and qualitative assessments. This evaluates the organisation’s structure, experience and expertise of the investment decision makers, the suitability of the investment approach and the consistency of performance aligned to their style over time. The second step is to effectively combine these exceptional managers with the aim to blend the different styles that deliver outperformance at different times. It is therefore not unusual and should be expected, that not all underlying funds will outperform over all short-term periods.
Key pillars for rating managers
We employ an investment process that focuses on the internal rating of three qualitative pillars rather than only on the short-term performance. These pillars qualitatively assess whether managers are above average in terms of their organisational structure and stability; people and support; and their investment approach.
In the organisational structure and stability pillar, some of the areas that we focus on are misaligned incentives, lack of majority control, and inability to reach critical scale. This pillar also looks at whether the firm is managing its own evolution appropriately, or is ill-placed to succeed. Material issues that could also concern us include key client concentration, lack of focus, and product proliferation.
The people and support team pillar includes assessing the implications of staff turnover, and key-person dependency, but also diversity and inclusion and the extent to which the investment team culture can continue to generate new ideas. A useful framing for this pillar (to assess whether it remains above average) is to ask how easy it would be for a competitor to replicate the team, and in what way the people and support pillar remains more than the sum of its parts.
Finally, investment approach is focused on our confidence that we have identified a manager’s enduring edge that has been applied consistently. Managers that don’t do what we expect of them, or arbitrarily change their approach, would get penalised in this regard. We’d also be skeptical of approaches that are easy to replicate or don’t appear to have significant barriers to entry.
As new information arises, we’re astute enough to reconsider previously held views on managers and their ratings. But we follow a diligent process to ensure that we have carefully considered all the information at our disposal to make an informed decision.
Firstly, our process deliberately tries to protect us from downrating a manager simply because it is performing poorly, but rather draws our attention to whether we think the manager remains best in class. This is because, in responding to short-term underperformance, many of us terminate a manager at precisely the wrong time, to the detriment of future portfolio returns.
Secondly, we maintain a record of all our previous manager rating downgrades, which we can refer to, in framing how to approach our current decision. While it is important to view each case on its own merits and not default to uniformity simply for the sake of it, it is also important to have some consistency in how we rate managers. At the very least, we should know why we are making an exception with a particular decision. For example, a surprising launch of a new strategy from a manager could lead to a rating downgrade, if we felt it would distract the investment team. However, this would not automatically result in a rating downgrade, and the materiality would be thoroughly discussed before reaching a decision. Regardless of the decision, careful documentation helps our process evolve over time and ensure the next decision would be framed even more comprehensively.
While the decision to replace a manager is often because the manager’s process has degraded, rather than the manager has been left behind by its peers, it is also important to assess whether the manager has not moved with the times. Again, there is a tension to the manager sticking to its investment process, and being agile to adapt to a changing environment, where necessary. Examples here include how the manager thinks about ESG or the return to the office in a post-COVID world. In both cases we would expect the manager to have thought deeply about these issues if it is to remain best in class.
In short, replacing a manager is seldom straightforward, and may be done at the wrong time. We remain open to learning from previous termination decisions that may have been wrong, as well as the material red flags that were ignored. Carefully documented learnings and institutional memory can help to inform future decisions.
Focusing on forward-looking risks and opportunities rather than backward-looking performance, and challenging the thinking that the manager is truly exceptional, is a helpful starting point in framing the decision.
The aim of manager selection is not to predict which managers are going to perform best in the immediate future, but to invest with a combination of managers that will deliver a competitive return regardless of the economic environment. This mindset ensures that all manager selection decisions are thoroughly analysed and continually reassessed with regular meetings with these managers.
Through our multi-manager philosophy and in-depth research, you gain access to the country’s top asset managers combined into one solution. We blend an appropriate combination of investment styles and asset classes that are best suited to take advantage of opportunities at different times in the cycle, thereby offering optimal diversification in your portfolio.