WEBVTT 1 00:00:09.019 --> 00:00:12.280 Manager Selection plays a significant role in 2 00:00:12.280 --> 00:00:17.060 how we invest for clients here at Barclays, especially given the benefit of 3 00:00:17.060 --> 00:00:21.619 additional returns if undertaken well. I'm Phil Attreed, Head of Investment 4 00:00:21.619 --> 00:00:25.320 Consulting for Barclays Wealth & Investments, and I'm joined today by Ian 5 00:00:25.320 --> 00:00:29.770 Aylward, Head of Manager and Funds Selection, and today we'll look at the 6 00:00:29.770 --> 00:00:34.090 new publication, "The Science and Art of Manager Selection" and how it influences 7 00:00:34.090 --> 00:00:38.390 the investment process here at Barclays. Ian, could you start by explaining the reference 8 00:00:38.390 --> 00:00:40.940 in the title to both science and art? 9 00:00:40.940 --> 00:00:44.820 We all know that a manager's historical performance record is no guarantee of future 10 00:00:44.820 --> 00:00:49.800 performance, yet a scientist wouldn't ignore the results of past experiments. Like science, 11 00:00:49.800 --> 00:00:55.430 our process is formal, structured and repeatable to create comparative data points across institutions 12 00:00:55.430 --> 00:01:00.020 and asset managers. Like art, our process is informed by a philosophy that guides our 13 00:01:00.020 --> 00:01:05.329 collective judgement. This means integrating our objective findings in a creative way and applying 14 00:01:05.329 --> 00:01:11.060 our many years of collective experience. Our combined approach gives us the confidence 15 00:01:11.060 --> 00:01:14.659 to identify and recommend managers to clients. 16 00:01:14.659 --> 00:01:18.920 Why is it so important that we as Barclays invest in the expertise to undertake this 17 00:01:18.920 --> 00:01:21.799 process with such rigour for our clients? 18 00:01:21.799 --> 00:01:27.759 There are two very powerful forces in investing. The power of compounding and the power of 19 00:01:27.759 --> 00:01:31.560 diversification. We are not seeking to invest in just the average 20 00:01:31.560 --> 00:01:35.810 manager. Our goal is to invest with some of the very best managers in each asset class 21 00:01:35.810 --> 00:01:42.090 that generate say, 1% additional returns over benchmark per annum, over a market cycle will, 22 00:01:42.090 --> 00:01:47.189 steadily, over the years, have a meaningful positive impact on clients' wealth, benefiting 23 00:01:47.189 --> 00:01:51.349 from this compounding effect. Diversification refers to the fact that spreading investments 24 00:01:51.349 --> 00:01:56.029 across superior managers lessens risk and so the optimal blending of managers is something 25 00:01:56.029 --> 00:01:59.889 that the team spends a lot of time on. The approach is to try to identify managers whose 26 00:01:59.889 --> 00:02:04.379 success has been based on their investment skill rather than luck. 27 00:02:04.379 --> 00:02:06.259 Could you give a brief introduction to our 28 00:02:06.259 --> 00:02:10.619 5P framework on which we base our Investment due diligence process? 29 00:02:10.619 --> 00:02:16.130 We believe that there is no one simple way of verifying the presence of skill. Investment due diligence is 30 00:02:16.130 --> 00:02:22.430 implemented using the tried-and-tested '5P' research framework whereby five key areas, 31 00:02:22.430 --> 00:02:27.530 each starting with the letter P, are assessed and scored from 1 to 5. A good score in each 32 00:02:27.530 --> 00:02:34.040 of these five areas is critical to the likelihood of future success. The 5Ps are: Parent, People, 33 00:02:34.040 --> 00:02:38.180 Philosophy, Process and Performance. Parent refers to the organisational structure of 34 00:02:38.180 --> 00:02:42.920 the fund management firm and includes a look at AUM, strategy and compensation practices 35 00:02:42.920 --> 00:02:47.790 amongst other things. Investment talent is the key and so we assess the team dynamic 36 00:02:47.790 --> 00:02:53.730 and experience under People. Philosophy refers to what market inefficiency a manager is trying 37 00:02:53.730 --> 00:02:59.620 to exploit €“ why does it exist and will it persist? How the People apply the Philosophy 38 00:02:59.620 --> 00:03:06.130 day to day is addressed under Process €“ idea generation, portfolio construction, risk management, 39 00:03:06.130 --> 00:03:11.100 etc. Finally, Performance. Clearly our research approach is not about simply extrapolating 40 00:03:11.100 --> 00:03:16.290 past performance and so it this is just one of the five areas. Here we study historic styles, 41 00:03:16.290 --> 00:03:21.650 risk characteristics and attribution for example. Each of the areas is further broken down into 42 00:03:21.650 --> 00:03:23.440 3-4 sub-categories each and scored. 43 00:03:23.440 --> 00:03:28.970 It is also important to highlight our resolute focus on operational due diligence as well. 44 00:03:28.970 --> 00:03:31.390 A few words on this please. 45 00:03:31.390 --> 00:03:36.630 Absolutely. Our manager due diligence process can be divided into two distinct steps: the 46 00:03:36.630 --> 00:03:40.051 investment due diligence which I have been talking about so far, and the operational 47 00:03:40.051 --> 00:03:46.130 due diligence. Operational due diligence aims to assess and mitigate business and operational 48 00:03:46.130 --> 00:03:51.740 risks. It is of paramount importance to remember that when you take on more investment risk, 49 00:03:51.740 --> 00:03:56.210 you would expect to get a greater investment return in reply. But when you take on greater 50 00:03:56.210 --> 00:04:00.610 operational risk, you just don't benefit at all. Therefore, operational due diligence 51 00:04:00.610 --> 00:04:02.650 is a critical part of the process. 52 00:04:02.650 --> 00:04:07.900 My final observation would be that the due diligence of a manager is not a one off or 53 00:04:07.900 --> 00:04:12.690 ad hoc exercise here at Barclays, could you say a few words about the ongoing work of 54 00:04:12.690 --> 00:04:13.690 the team? 55 00:04:13.690 --> 00:04:17.100 We meet appointed managers at least every six months, but are monitoring their performance 56 00:04:17.100 --> 00:04:22.600 on an ongoing basis. We receive formal reporting at least quarterly from managers. Examples 57 00:04:22.600 --> 00:04:27.039 of why we might sell a manager include departures of key individuals or a negative change in 58 00:04:27.039 --> 00:04:29.639 a firm's ownership structure. 59 00:04:29.639 --> 00:04:34.430 Ian, thanks for the introduction to the white paper. I hope those watching feel compelled to read 60 00:04:34.430 --> 00:04:38.930 further and take comfort from the work of your team, should they choose to invest 61 00:04:38.930 --> 00:04:39.619 at Barclays.