Are you personally invested in the fund?
This is usually to get some sense of “skin in the game”, but it’s too easy, and really not that important. The fund manager can answer yes; even if it’s just a small part of a company-wide incentive scheme , that invests in the fund, with a 2 year lock-in. In the words of investment guru, Shania Twain – that don’t impress me much.
Especially if that amounts to just 0.4% of the manager’s total wealth including the London house, the apartment in Antibes and the 3 Bentleys.
Also how important is it really? We had a recent example of a “rock star” UK fund manager who had significant exposure to his fund, and indeed the overall investment company. This did little to protect the investors from underperformance and indeed severe capital losses.
Do you visit companies ?
Well, it seems a reasonable thing to do. But at least in the Large Cap world with no end to the availability of data and contact through conferences, video links, media outlets, broker and independent research etc. it’s difficult to see how much value is really being added for the time spent. Companies are also very aware of what can and cannot be said from a regulatory standpoint.
I think there may be some merit in the Small Cap space, but does travelling to Seattle to meet the Number 4 person in Investor Relations department of Microsoft really give you a competitive edge?
What keeps you awake at night?
Never, ever ask this. Even if you’re wondering what is the deepest, darkest fear the manager may hold for the portfolio. First of all you’ll get an answer like –“my 12 month old kid!” or such-like to get a laugh. Or something that none of us can control such as the fall-out from the Kurd conflict in Northern Syria. But more importantly don’t ask this question because it says more about you, than the fund manager. It basically says “ I didn’t know we had this meeting this morning!”
Are you passionate about investing?
Really – do you want someone who is passionate about investing? Passion should be for your lover, your kids or if you’re lucky the football team in your home town. For investing. I think you’re better off with a manager who is disciplined, informed, intelligent, has conviction etc. As Adam Smith pointed out in “The Money Game” in the 1970’s “The stock doesn’t know you own it” and “It won’t love you back” The portfolio is not the place for passion.
What has been your biggest mistake?
You might think you should ask this question to get a sense of how the manager reacts to adversity. But managers see this coming, and typically give an example that paints them in a favourable light.
Answers are often along the lines of “We held XYZ which fell 40% on the trading update, which hurt – but then we added to our holding before the stock went up by 60%!” or “XYZ slumped by 40% and, disappointed, we sold out. It subsequently fell another 60%!”
But life is messier than that and things do go wrong and don’t end well. I think a confident, assured fund manager recognises this.
Some years back I met a highly regarded Emerging Markets manager in London who had invested in an Indian software company . Because of fraudulent accounting the company went bankrupt. The investment management company prided itself on the rigour of its research. The manager’s answer was simple “We got it wrong.” Adding that fraud can be very difficult to anticipate.
He immediately soared in my estimation!
Tradewinds 