A New Era for Active Managers: Are You Ready for the Tough Questions?
“We don’t think we were wrong. We think we were early.”
A cringe-worthy answer that rings alarm bells for investment consultants.
Higher inflation, increased market volatility, and more variable nominal interest rates create significant opportunities for active managers who can prove their worth with innovative, customer-centric products. As scrutiny on active management intensifies, investment managers must be prepared to answer the tough questions posed by a more discerning allocator market. Are you ready to shine in your next beauty parade?
The Evolving Dialogue Between Allocators and Managers
In a recent conversation with Evan Frazier and Joe Wiggins, experts in manager selection, they shed light on the challenging questions investment consultants and asset allocators are now asking potential managers. Frazier, CFA, CAIA, is a senior research analyst at Marquette Associates in Chicago, while Wiggins is the director of research at St. James’s Place in London and an author of a well-known blog on investor behavior.
Here are four challenging questions that managers should be prepared to answer, along with the rationale behind them:
If you were to run your strategy systematically as an algorithm, how would you do it?
Wiggins evaluates a manager’s process based on their beliefs, decision-making process, and outcomes. This question focuses on the manager’s approach to utilizing technology and human energy effectively in their process.
What are some mistakes you’ve made throughout the strategy’s history or your tenure? How have you reacted?
Acknowledging and learning from mistakes is crucial. Allocators value managers who demonstrate humility, accountability, and a proactive approach to improving based on past missteps.
Assuming recent performance is not necessarily a good indicator of your actual skill level, how do you measure the success of your decision-making?
Looking beyond headline performance, this question delves into the philosophy and approach underlying a manager’s strategy, demonstrating a deeper understanding of their skill beyond just returns.
How has your investment process evolved over time?
Investors expect managers to adapt and evolve their processes in response to changing market dynamics and technological advancements, while staying true to their core philosophy.
As the landscape of active fund management evolves, the focus is shifting towards “behavioral alpha” – the excess returns generated through self-improvement and self-awareness. Being prepared to answer tough questions and continuously improving are crucial for success in a competitive and changing market.
Active managers who embrace transparency, adaptability, and a commitment to excellence are better positioned to navigate the challenges of today’s allocator market. Building strong partnerships and prioritizing investor interests will set a new standard for success in the active management industry.