Manager Selection plays a significant role in
how we invest for clients here at Barclays, especially given the benefit of
additional returns if undertaken well. I'm Phil Attreed, Head of Investment
Consulting for Barclays Wealth & Investments, and I'm joined today by Ian
Aylward, Head of Manager and Funds Selection, and today we'll look at the
new publication, "The Science and Art of Manager Selection" and how it influences
the investment process here at Barclays. Ian, could you start by explaining the reference
in the title to both science and art?
We all know that a manager's historical performance record is no guarantee of future
performance, yet a scientist wouldn't ignore the results of past experiments. Like science,
our process is formal, structured and repeatable to create comparative data points across institutions
and asset managers. Like art, our process is informed by a philosophy that guides our
collective judgement. This means integrating our objective findings in a creative way and applying
our many years of collective experience. Our combined approach gives us the confidence
to identify and recommend managers to clients.
Why is it so important that we as Barclays invest in the expertise to undertake this
process with such rigour for our clients?
There are two very powerful forces in investing. The power of compounding and the power of
diversification. We are not seeking to invest in just the average
manager. Our goal is to invest with some of the very best managers in each asset class
that generate say, 1% additional returns over benchmark per annum, over a market cycle will,
steadily, over the years, have a meaningful positive impact on clients' wealth, benefiting
from this compounding effect. Diversification refers to the fact that spreading investments
across superior managers lessens risk and so the optimal blending of managers is something
that the team spends a lot of time on. The approach is to try to identify managers whose
success has been based on their investment skill rather than luck.
Could you give a brief introduction to our
5P framework on which we base our Investment due diligence process?
We believe that there is no one simple way of verifying the presence of skill. Investment due diligence is
implemented using the tried-and-tested '5P' research framework whereby five key areas,
each starting with the letter P, are assessed and scored from 1 to 5. A good score in each
of these five areas is critical to the likelihood of future success. The 5Ps are: Parent, People,
Philosophy, Process and Performance. Parent refers to the organisational structure of
the fund management firm and includes a look at AUM, strategy and compensation practices
amongst other things. Investment talent is the key and so we assess the team dynamic
and experience under People. Philosophy refers to what market inefficiency a manager is trying
to exploit €“ why does it exist and will it persist? How the People apply the Philosophy
day to day is addressed under Process €“ idea generation, portfolio construction, risk management,
etc. Finally, Performance. Clearly our research approach is not about simply extrapolating
past performance and so it this is just one of the five areas. Here we study historic styles,
risk characteristics and attribution for example. Each of the areas is further broken down into
3-4 sub-categories each and scored.
It is also important to highlight our resolute focus on operational due diligence as well.
A few words on this please.
Absolutely. Our manager due diligence process can be divided into two distinct steps: the
investment due diligence which I have been talking about so far, and the operational
due diligence. Operational due diligence aims to assess and mitigate business and operational
risks. It is of paramount importance to remember that when you take on more investment risk,
you would expect to get a greater investment return in reply. But when you take on greater
operational risk, you just don't benefit at all. Therefore, operational due diligence
is a critical part of the process.
My final observation would be that the due diligence of a manager is not a one off or
ad hoc exercise here at Barclays, could you say a few words about the ongoing work of
the team?
We meet appointed managers at least every six months, but are monitoring their performance
on an ongoing basis. We receive formal reporting at least quarterly from managers. Examples
of why we might sell a manager include departures of key individuals or a negative change in
a firm's ownership structure.
Ian, thanks for the introduction to the white paper. I hope those watching feel compelled to read
further and take comfort from the work of your team, should they choose to invest
at Barclays.