Does your manager have the right mindset for persistence?
Adrian Furnham has three doctorates, has written over 650 scientific papers and 55 books, and has dedicated part of his career to identifying the behavioural flaws that make investors with good ideas unlikely to perform – but sometimes asset managers make it easy for him.
Professor of psychology at University College London but also a principal in behavioural psychology at investment consultancy Stamford Associates, he tells me of his surprise at the brazenness of some fund manager interviewees, when asked questions designed to assess their ability to leverage their team’s skillset.
Picking out one anonymous candidate in particular, he recalls: “He said, ‘Well, I do two things; first of all, I give them fancy promotions with dubious titles, and then I sack 50 per cent of them every two years’... you thought, this isn’t good.”
That fact that you know about loss aversion doesn’t make you less loss averse
Psychology, as Professor Furnham points out, is everywhere, and this is instantly recognisable to anyone working in pensions. One need only look at the central role played by behavioural economics in the design of auto-enrolment to see psychological concepts at work.
Yet, bizarrely, popular culture has imbued us with the idea that success in investing requires an understanding of the behaviours that divert asset prices away from their efficient true value, but is not particularly linked to the emotional intelligence of the investor themselves – the sociopathic money-making genius pops up time again in books and films.
Good teams drive good returns
Professor Furnham and his employer take a more nuanced view in their attempts to pick consistently outperforming active managers, an endeavour in which the Competition and Markets Authority tells us Stamford’s peers have found limited success.
He says managers' emotional intelligence, alongside the robustness of their investment philosophy, plays an important part in determining the likelihood of their success. According to the professor, this speaks to the way they manage the team on which they will undoubtedly rely.
Professor Furnham or another of the three-strong team of psychologists will sit in on interviews between prospective fund picks and Stamford’s analysts, and assess whether the “mini corporate culture” between portfolio managers and analysts is conducive to discipline in turning a good idea into persistent performance.
Their job is to look for “emotional regulation” and a sensible approach to risk, prudence, conscientiousness, and hard work. Often, they learn the most about an individual by interviewing their colleagues.
While money managers “come in all shapes and sizes psychologically”, Professor Furnham identifies a tendency, as in other businesses, for technically skilled staff to be promoted into managerial roles for which they are less well suited and which “take them away from what they love”.
Managers fall for behavioural biases
That is not to say that Stamford only selects likeable fund managers. “Our job is to evaluate the nature of how their relationship is affecting their decision-making,” Professor Furnham says, explaining that many asset managers fall victim to well known biases such as loss aversion or overconfidence.
Many managers are well read on the subject of behavioural psychology, but this does not necessarily mean they can game the system. “That fact that you know about loss aversion doesn’t make you less loss averse,” says Professor Furnham.
Consulting the expertise of a psychologist is considered unusual in the world of manager selection, but given that so much is made of the individual fund manager and their ability to outperform, perhaps it is time for trustees to ask questions of the personality behind their returns.
Professor Furnham says his inclusion in the selection process is often seen as odd, to which he replies: “Well it’s rather odd you don’t.”