Strength in numbers
Even the most brilliant investors need support. Warren Buffett finds this in Charlie Munger. They also need to be challenged, and achieving this balance is difficult. “We spend a lot of time looking at the environmental factors,” says JANA’s Carew. “We need to see that discipline, and that there is questioning in the team about investment theses – particularly when there is a star portfolio manager in the team.” Towers Watson goes further. Dougherty says great investment performance is usually the product of a team – not a star manager. “Very, very rarely have we allocated money to a firm that relies on a star manager. It’s almost never down to one person. “We all love to think there’s this star manager. There are very few iconic and individually deserving investors. It’s about teams. People working together cohesively.”
This focus on finding good teams is pragmatic: there are more great teams than great individual investors. Even if a fund can gain access to freakishly talented manager, the amount of capital they allocate will only ever be a small slice of their total portfolio. Worldwide, all of the great managers in existence can only manage a fraction of the capital available, and in Australia alone, there’s now more than $1 trillion. At Perpetual, the team produces the investment outcomes, but their work is a collection of individual efforts, Sevior says. Sole pursuits are part of the manager’s culture: within some broad, strict rules, investors are given the freedom to make their name and to commit mistakes. “Here, I’ve enjoyed – for the last 16 years – the freedom to do it my way,” he says.
Sevior makes candidate employees speak with about six different team members during the recruitment process. Each conversation yields different insights about the candidate’s qualities: their intelligence, keenness, compatibility, independence and more. This happens more or less routinely (the company attempts to hire ahead of need), but it can take up to 12 months to find a suitable newcomer to bring on board. Much can be judged about a manager by observing whom they hire, and the reasons why. The worst justification for an appointment Dougherty has ever heard was completely underwhelming, and not just for the researcher: “because they were available”. “People should be there for their capability set, not to satisfy an imminent need,” he says.
Now for the most impressive response. The best reason for an appointment – in addition to demonstrable talent and compatibility – was that the candidate agreed to gain their bonus only after 10 years of work. Dougherty was floored. “Now that’s alignment. It gave me a real sense of what that business was about.” To learn how good an investor is, and how passionate they are about the craft, Sevior finds that much can be revealed by a simple and direct question: What do you do with your own money? “That’s often the question that sorts them. You can tell it in what they own. If they own good stocks or rubbish, or if they don’t have a good proportion of their money in the market,” he says.