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.
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.
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.