Assessing fund manager failures vital

Poorly performing investments can be as revealing as successes for assessing fund manager skill, according to Towers Watson Australia head of investment research Hugh Dougherty.

Assessing investment skill required a comprehensive understanding of the fund manager's investment philosophy, process, and execution of process, Dougherty said.

"It is important to recognise that mistakes are an inevitable consequence of taking risk where uncertainty exists, and the identification of these mistakes in a portfolio, in the context of broader understanding of an investment manager, can be very helpful in determining the presence of genuine skill," Dougherty said. 

He said it was possible for a genuinely skilled manager to generate poor returns for an extended period of time due to their patience, a key characteristic of great investors according to Dougherty.

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He said skilled managers understood that building long-term wealth required resisting the temptation to follow the excitement that builds around out-performing investments.

"Effective investors are equipped with the strength of personality to resist hyperbole and often invest in less popular areas.

"They do not conform to popular market strategy, and build teams of colleagues who will challenge their ideas and investment philosophies," he said.

He said detailed examination of investments within a portfolio and inconsistencies with processes and investments that contradict processes are all indicators of fund manager skill.

"Getting inside the minds and hearts of managers requires an understanding of the investment drivers and key issues for reaching investment decisions on selected investments," Dougherty said.

He said finding investment skill represented a material cost to most firms, but the benefits of choosing a skilled fund manager were worth the effort.