How CFS identifies fund managers that drive growth

At CFS, selecting the right fund managers to add to our portfolio of investment options is the foundation on which our strong investment performance is built. 

There’s a lot of comfort to be had in focusing on the returns they offer, which are easy to understand, easy to track and easy to assess. 

But digging deeper into the numbers, and the people behind them, is more important.  

This is what I see as the art of fund manager selection. 

Fund managers must be able to explain their investment philosophy and the competitive advantages they offer. 

But understanding culture and the personalities is critical. 

When there is a positive culture, there is a positive team dynamic and people are bringing their full selves into work on a daily basis. 

They’re fully engaged, they want to put forward their best ideas, and know that those ideas are being heard. 

We want to understand not only how the portfolio manager thinks, but how other team members contribute to an investment process.

Doing our due diligence is not just something we do upfront, but an ongoing process that is always front-of-mind. 

We are always looking for continuous improvement – even in strong performing managers. They should always be looking to do things better.

I also like to ask them about the mistakes they’ve made.

A good manager is always reflective, and if they’re not learning from their mistakes, then they’re not thinking about how they can improve.

With growth managers, there will be periods of volatility and underperformance, so it’s really important to understand our true investment time horizon.

Changing managers will incur costs, so we don’t want to make changes if there’s an understandable explanation for performance outcomes.

Sometimes underperformance can be predicted by organisational change: even the quiet departure of a few analysts could be a sign that something is wrong.

There’s always an explanation for why people may have left, but if there’s a persistent theme or cultural issue, we’ll want to look more deeply into it.

We may do mini-exit interviews to examine whether there are cultural or team dynamic changes that have led to certain departures.

Honesty and transparency are important qualities in fund managers, and we’ll test it.

For example, if a manager highlights something as a competitive advantage, then we’ll want to see it in action or evidence that it is being used. 

Other warning signs that may warrant further investigation include:

• managers who are in the right stock but their rationale for owning it is not a driver of stock performance;
• those who try to pass luck off as skill;
• managers who have an investment ‘philosophy’ that has little to do with their investment process;
• a demonstrated inability to adapt to changing markets.

Managers need to be able to consider changes in the economy and markets – Artificial Intelligence, for example, because it has the potential to change corporate dynamics for every company.

We engage with a lot of managers because we are always looking to improve our manager line-up or reinforce our confidence in our existing managers.

The most polished packs and presentations we come across aren’t necessarily the best managers – it just means those managers are very used to presenting to potential investors. 

Some very good investors might not be the most extroverted and natural presenters – and if they aren’t great at marketing then they’re not going to have as much in the way of assets under management. 

That can be attractive for us. 

We look for substance over style.  

Ben Lam addressed an audience of fund managers on the art and science of fund manager selection at the recent Equities and Growth Symposium in Sydney.