In the week that Thomas Tuchel was appointed England football manager, James Klempster discusses the similarities to and differences with selecting fund managers.
Hello, it's Friday 18th October. I thought we'd pause for just a few moments and reflect on what's been going on this week. The England men's football team has a new manager in Thomas Tuchel. That's not necessarily market-related of course. But we've had the Football Association going through a manager research process, and the Liontrust Multi-Asset team does a lot of manager research, so I thought we'd explore the similarities and the differences between these two processes.
Combination of inputs
In terms of the similarities, let's start with a big one, which is the research itself: whether you've been thinking about a football manager or an investment manager, it's a combination of qualitative and quantitative inputs. It's the art and the science, as we like to think about it. Whether it be a manager of football or an investment manager, there's loads of data available regarding their performances in terms of success, but also the characteristics underlying that sort of success, right down to the minute.
In football terms, this could be how the team displays itself on the pitch, or the impacts of set pieces etc. But with investment managers, we look at information such as their holdings and their stylistic profile. Ultimately, all this data does is provide a rich historical picture. You must use that information to give you the confidence that what you're doing is appointing a manager who will deliver for you in the future. Ultimately, you take all that information on board, understanding the philosophy and the process of the manager, getting to meet and know them.
That's an important element as well. Whether it be appointing a football manager or an investment manager, you need time, resources and access to understand them. That process is trying to understand, in an unknown future environment with conditions thrown at you that you can't predict with any certainty today, do they have the right combination of attributes? Have they demonstrated historically the right combination of attributes to navigate the unknown as effectively as possible? Ultimately, the judgement is the art that comes at the end of all the science that put you in a position to make that decision.
There are other areas of similarity. I'm sure Thomas Tuchel is not the cheapest option available. It's similar with investment managers. You can go for cheap, investing in markets almost without cost these days, and sometimes that's not a bad strategy – we use passive vehicles in our own Multi-Asset solutions.
Ultimately, when you're paying for an active manager, the question is: are they going to offer good value for money? Similarly, I'm sure there's plenty of people that would have taken the England job for much less than Thomas will be paid, but if they don't deliver the goods and get the results you're looking for, then they would represent bad value for money. In this instance, the FA thinks: “Well, you know what? Let's pay a bit more, or potentially substantially more.” I don't know what Tuchel is being paid, but it must represent good value for money if he delivers the goods.
Blending for success
The question then is: what is good performance? How do you judge good performance, whether it be in active investment managers or in football? You need clear parameters around which you can judge success, whether it be win / loss ratio, winning a particular trophy or, in investment land, how you generate long-term risk-adjusted returns or characteristics, and particularly, how you deliver within the bigger picture of the overall portfolio blend.
There are clear parameters stated in advance that you understand. It doesn't mean that you get those results in a linear, predictable fashion. It often comes lumpenly, the point being that you understand what you're looking for and you can then clearly measure success against those parameters.
Let's think about some differences. The big one for us when we're looking at putting investment managers into a portion of the portfolio is that we like to blend different managers because they have different characteristics. Their stylistic differences offset each other's rough edges, so you get a combination that's greater than the sum of the parts. In the England job, though, Thomas Tuchel is the man in the frame.
To extend that analogy, we'd want Thomas Tuchel to run one part of the squad and perhaps Jurgen Klopp to run another part, or maybe even Jose Mourinho with his dour approach being both complementary and different. It may not be beautiful on its own, but the combination of those three or four managers would be greater than the sum of the parts. That is a substantial difference when you're thinking about appointing investment managers, or one football manager for the top job.
Another area that's different is time horizon. Apparently, Thomas has been appointed on an 18-month contract. When it comes to active management, 18 months is not a particularly long time to generate the sorts of results we're looking for. That time in the market can be open to noise, big sentimental shifts in markets and luck being a prime determinant of whether you've outperformed or not. Over the longer term you get the opportunity for the fund manager's skill to come to fruition, so the medium to long term is where we're looking to appoint a combination, a blend of investment managers to create the sorts of results we're looking for. So that's an interesting difference.
That's it from me. Have a good weekend when you get there, and we'll see you next time.
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