Mark Nebelung: Can I just ask, what is the mind set of a successful concentrated portfolio manager?
David Wright: Personally I think it goes right to the heart of the investment process. It can start right from the initial stock screening and what are the factors that are important in that process, that then defines the universe that the manager’s going to concentrate in with further research. With a lot of the boutique Australian equity managers, I think in the main most of the ones that have generated good alpha have tended to do so reasonably early on through probably medium and small cap. And as they become institutionalised, for want of a better term, both the weight of money and I think the business risk, sort of forces them obviously to hold larger stocks and probably less active positions in those stocks.
Kristian Fok: People often interchange the term ‘benchmark unaware’ with concentrated. But that can be two very different things. There will be times when there’s just too much sporadic risk, that it doesn’t really make a lot of sense to force a manager down to a narrow set of ideas.
Russell Clarke: Financials are a great example in the current climate. The manager might hold a view that financials have been grossly oversold, and you’re going to tell him he can hold only one?
Kristian Fok: Exactly – concentration is a nice concept but if you get too rigid about it, you can probably do more damage. Amanda White: What about you, Greg, any preference for concentrated versus diversified managers?
Greg Liddell: We manage risk at the aggregate portfolio level, so most managers we use are concentrated in one way or another, with the exception of the quants where it’s a matter of releasing the short constraint, because of course concentration of quant strategies doesn’t make sense. The consequence of that is you’ve got to be prepared for individual managers to tread on landmines from time to time.
Tim Dunbar: Are your clients willing to accept that kind of volatility?
Steven Carew: One of the things we’ve found is putting a group of concentrated managers together doesn’t mean that you get a higher tracking error portfolio. You can still end up with a relatively low tracking error, but you’ve increased your stock selection risk. If you haven’t chosen the right managers you can get a worse result than picking a group of core managers. And I think one thing that’s been exposed with concentrated managers is that this reaching for risk, in the low volatility environment that we’ve seen until recently, has come back to bite a few people because they didn’t understand perhaps as well as they should what they were doing with their portfolios.