A flippant, fearless, and fundamental countdown of big money investing.

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Art by Yuko Shimizu

#37 Manager Selection

The Secret Sauce

Most research indicates that the hiring and firing of managers actually detracts value, the result of too much ‘performance chasing.’ Our record of successful manager replacement is quite different.

Our manager selection process reliably delivers, within three years of the decision, 350 basis points of alpha from the new manager outperforming the replaced manager; the industry average is negative 140 basis points.

Is there a secret sauce?

There is a set of necessary, but not sufficient, conditions for becoming successful portfolio managers: An ethical culture, discipline, appropriate size, track record in the context of market whims, and experience. But the most important factor for success—and the one that will most set you apart from your peers—is the uniqueness of your approach and how receptive market conditions are to it.

Since our years of managing the World Bank pension fund in the 1980s, we have seeded dozens of new approaches, most of which led to significant value added as well as great business success for their proponents. Bridgewater Associates might be the most well-known—but there have been many others.

What is common in these firms is a culture of continuing break-through research and innovation, the discipline to close their products to new assets when size threatens their ability to add alpha, and exceptional trading and portfolio construction skills, as well as all of the other quality-of-governance factors that keep attracting great talent. Interestingly, some of our most successful managers are not particularly good at retaining great talent (many of their researchers, traders, and portfolio managers end up leaving the firm after one conflict or another opportunity), but critical to their success is the ability to replace great talent and to keep improving their value creation process.

Critical to our own success in adding value through manager section are four criteria: one, not terminating the manager when it goes through a phase in which the markets are not rewarding its style; two, striving to size our risk exposure to the manager properly; three, diversifying our sources of expected value added efficiently and intelligently; and four, our own assessment of price-to-fair-value and competitiveness of the strategy being followed.

Manager selection has been one of our most important sources of value added for the last 28 years, while asset allocation and asset class structuring, like the pedals on a piano, have been our principal means of risk control. If there is a secret sauce, that is it.

Hilda Ochoa-Brillembourg is the founder and chairman of Strategic Investment Group.

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