After research house Morningstar has assembled performance data on the mutual funds it covers, picking the best managers for its ratings and advisory business becomes a matter of personal interaction, according to YT Kum.
Because it is hard to convince clients that a fund is a future star when its current performance isn’t as good as peers, due diligence has to look past quant screens, said Kum, head of fund selection in Asia.
He gave tips to the audience at an AsianInvestor conference for fund selectors in Hong Kong. “Picking a good portfolio manager is like picking a girlfriend,” he said. “It requires experience, not just knowledge.”
The factors he considers include:
- Does the manager invest in his or her own funds? Kum believes this represents a true alignment of interests, and dismissed reasons why some PMs do not.
- Passion, but Kum said this must be articulated. He likes managers who get excited detailing every security pick, who express curiosity in daily life, who get obsessive in hobbies and who are athletically competitive – not so much because they enjoy sport, but because they are disciplined about training and demonstrate a will to win.
- Learning from mistakes. This is a truism, but Kum looks for PMs who understand success and errors in every position, even small ones; he cringes at managers who promise to “get back to him later”.
- Frank speech. Kum dislikes PMs overtrained to stick to their slides, and who struggle to answer questions freely or deviate from marketing language. For example, he is skeptical about claims that PMs are just 'bottom-up stockpickers' who don’t consider the macro picture. He thinks this is a dodge.
One head of fund selection at an investment group who listened to the speech told AsianInvestor that he found it unusual. “We don’t do things that way,” he said, noting that many banks or family offices would prefer to rely on performance data.
Of course, Morningstar pores over data around fund performance, investment process and price, but it also adds quantitative and subjective views about the individuals managing the portfolios.
Kum revels in asking PMs offbeat questions – not to be cute, but simply to get them to speak more spontaneously, away from pre-packaged slides. This helps him identify both managers he believes are superior, as well as those who are mediocre.
But even he recognised that sometimes the personal approach can be too much. “I used to try to catch them off-guard by asking them questions like, if you were Harry Potter, how would you use your magic powers to change your performance?”
Kum said he realised this was a little too much, however. “So I don’t ask any more questions about Star Wars or Harry Potter,” he said, grinning. “Learn from your mistakes.”