Verbal Reasoning

Verbal Reasoning

No one person is capable of knowing the best selection of emerging market stocks. A team of sector specialists with equal voices could be a better solution.

Fund managers should take a continual interest in how they can gain an extra edge in their investment outcomes and curtailing negative behavioural biases is a key area to consider here.

Groupthink in a team will mean a less critical evaluation of stocks where a team is inclined to minimise conflict around decision making. Alongside this, mis-aligned incentives can lead to sector specialists seeking to beat or promote their individual sector, rather than choose what is optimal for the portfolio overall.

Both situations limit the potential for a manager to optimise stock selection and maximise performance. To remove these biases many prominent institutional investors such as Bridgewater and the Future Fund (Australia), favour new investment decisions to be debated by the whole team, regardless of their asset class or sector specialty. Accordingly, such teams are rewarded for the performance of the entire portfolio to align incentives.

Similarly, as part of our process to gain conviction around stocks, our team of seven portfolio managers with an average investment experience of 20 years, adopt a flat structure and collaborative approach. This harnesses our collective knowledge and different perspectives throughout the process of analysing investments.

Unanimous approval

Each stock we pick must receive unanimous approval from the team with the voice of each member given equal weight. This forces the airing of all the issues around a stock, which might otherwise be missed. Each team member brings their own diversity of thought, as well as their own research experience and perspective to this debate. The process recognises that any single portfolio manager, despite years of experience, can never fully know everything about the emerging markets universe—or about every stock in these markets.

To ensure our incentives are aligned with our process, all team members are remunerated according to the team's total success, rather than the stock picks they look after. We believe this is the best way to align people around a common goal.

The beauty of this process can be seen in how we use it to create our own an opportunity set of stocks from the global emerging markets universe. Creating a research list of 100-120 stocks requires unanimous approval from each person on the team. The process forces all the issues that might be latent around a stock to be discussed and open. Once the list is agreed, the business of choosing the stocks tends to become a technical, rather than a passionate discussion, focusing on the best mix of stocks in terms of overall factor risk, rather than advocacy for a particular sector, country or stock.

 

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