Livewire recently caught up with industry veteran Chris Cuffe to get his candid views on the attributes he values most when selecting fund managers. This article covers Cuffe’s key criteria, important metrics and some of the funds he is backing today.
Edited transcript of interview with Chris Cuffe
It’s about the individual not the brand
I never follow funds management firm brands - I'm interested in the individual. I'm very interested in the past track record, in fact, it amazes me that most legal documents say past performance should not be relied on, or looked at for a guide to the future. I can't think of anything better to rely on; I want to see a snail-trail of how the manager has worked - across different market environments - to understand how they work.
Look for managers who are truly active
In my experience over many years, not many managers can truly add active value. They do exist, but there's not as many as perhaps have their shingle up saying they can do it. So I'm very selective.
I'm looking for managers who actually go out and try and swing the bat. There's no point using a manager who is trying to get a little bit at the margin. I'm only interested in managers who give it a ‘proper go’; and those managers either going to do really well, or really badly. It's just a matter of experience in finding those people who do really well.
Look for certain traits in the individual
Great fund managers are often a ‘little quirky’ in some areas, and that's because they're obsessive about their trade. I've always said the weirder fund managers are, the better they are. And those who do really well generally have a bit of grey hair!
I've always said the weirder fund managers are, the better they are!
- Assess past performance: Past performance is essential to demonstrate how they have performed in different market cycles.
- Seek meaningful outperformance: Ignore modest ‘performance at the margin’, and seek the few managers achieving genuine alpha, i.e.: 3-4% outperformance of an index.
- Ignore the short-term numbers: Ignore 3-month or 1-year returns. Only start to look after 3 years. Wait for five years before deciding to withdraw from a manager.
- Review rolling 5-year periods: Essential to look for managers who can perform over rolling 5 years periods.
Who is Cuffe backing today?
Cuffe points to the managers he has selected for his charitable venture, the Third Link Growth Fund. It is a ‘fund of funds’ where the managers provide their services ‘pro bono’ and the proceeds are donated to charity. Names include:
- Ophir Asset Management
- Cooper Investors
- Harness Asset Management
- L1 Capital
- Lennox Capital Prtners
- Paradice Investment Management
- Montgomery Investment Management
- Pengana Capital
Recently Cuffe has also invested in and joined the board of EGP Capital. EGP charges no management fee and instead only charge a performance fee.
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Disclaimer: The information contained in this presentation is general in nature and should not be relied upon. Before making any investment of financial planning decisions, you should consult a licensed professional who can advise you whether the decision is appropriate for you. Contributors to this show may have commercial or financial interests in the companies mentioned.
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Most of the market does simply back past performance when it comes to manager selection, over both short and longer term track records. Unfortunately, once the manager has a long term track record, it is usually obvious to everyone and the manager is routinely flooded with capital as a result, which they may or may not be able to manage well from that point on. Often the manager has also changed in nature from a business point of view. As a result, some of these managers will be good investments and some will not (even if they have skill). A really great manager selector doesn't need to rely on a long term track record to tell who is good, as they understand what the manager is doing qualitatively and whether this is likely to add value or not. It is very important to be able to consider the risk taken to achieve a result, rather than just the return. Again, most manager researchers give far too much credence to return, and pay far too little attention to risk. Risk is routinely unappreciated, and this point is a surprising omission from this video. I would also point out that style can still heavily influence investment results and be confused for skill, even over 5 year periods. A low beta/quality bias in international equities post the GFC is an example that comes to mind. Yes, it is important to make sure your manager is actually active, and being different and having a different strategy is indeed usually a positive feature. It is good to see some active managers now only charging for performance that is an absolute positive, rather than charging fees regardless of how they perform. It is surprising why people continue to invest with managers who have a long term track record of not actually being very active or adding value. Often they have fairly convincingly demonstrated they are not up to the task, and are hence not worthy of any active fee. I would point out that manager selection is a rare but incredibly valuable skillset to have, as is asset allocation and portfolio construction. These deal with more critical issues than stock selection alone. It is good to see Livewire giving manager selection the attention it deserves.
I had similar criteria for fund managers myself but I have been burned several times recently: 1) Peter Hall (Hunter Hall) resigned abruptly on Christmas Eve 2016 after a poor investment performance following Donald Trump's US election win. 2) Richard Fish (Bennelong Long Short Equity Fund) announced his retirement in April 2017 after his new LIC Absolute Equity Performance lost 30% in a year. 3) Tony Waters & Chris Prunty (Ausbil Microcap portfolio managers) resigned in April 2017 "for personal reasons" after the unit price fell from $4.2 to $3 in 6 months. Now I am taking a risk by moving to ETFs "with the crowd" but I may be slightly contrarian by investing in BRIC countries that are currently cheap according to their Schiller CAPE.
I agree that fund manager changes are a problem and it irks me when one only finds out through the external media. However, Laurent, you need to be fair when inferring performance as reason for departure. The bulk of AEGs "lost 30%" was evaporation of the excessive premium over NTA applied by the market. You can't blame the manager for that. And while Ausbil Microcap did fall "from $4.2 to $3 in 6 months", 39c of that fall appears to have been a special distribution. Still not good, but .........