Chapter 10Manager Selection
Designing a Manager Selection Algorithm
Is Warren Buffett a good investment manager? It seems like such a seemingly simple question, but is it really? How do you define good? What factors should you consider? Is his entire track record relevant? The past 10 years? Five years? Last year? Should we consider only his average annualized returns? Calendar years or rolling 12 months? What about his drawdowns? Volatility?
Would your process differ if you were attempting to assess a hot‐shot trader from one of the big investment banks who doesn't have a track record as a CIO or even as a portfolio manager? How about a manager who's been generating exceptional returns on a small portfolio out of his garage, but has never worked at a large institution? Does it make sense to fast‐track one, but not another?
These are the questions that allocators should grapple with long before they invest a penny, but few do. Instead, fund managers are asked to fill out due‐diligence questionnaires with 400 or more questions. Consultants produce extensive reports and conduct intensive on‐site assessments. For what? Just as most portfolio managers never truly contemplate the impact that sizing has on their investment returns, most allocators have done very little to understand the role that experience, assets under management, research techniques, personal investment, or any of the other factors that they diligently gather information about have on a manager's returns.
For all ...