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Evaluating Active Managers:
The Role of Belief Systems

John R. Minahan
June 3, 2008

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Does the firm culture support or retard greater awareness of beliefs?
  A strong culture is usually viewed as a good thing.  However, since all the members of a culture by definition share a set of unconscious assumptions, a risk of a strong culture is a weak capability for surfacing beliefs.  Below I give you two examples of how firms have dealt with this, one where culture is used to enhance awareness and one where it seemed to reduce awareness.

 

 

  • Using subcultures to enhance awareness.  I once reviewed a manager whose investment process had two independent sub-processes, one quantitative and one fundamental.  Each sub-process was run separately, but then each group critiqued the other’s stock picks, and where they disagreed, each had to explain what they thought the other was missing.  These debates were used to identify blind spots in both sub-process, and to improve them over time.
  • Hiring practices and culture.  Another manager I once reviewed emphasized that they always hired inexperienced analysts and then trained them in their way of doing things.  All of the senior investment people in the firm started as junior analysts.  They considered this to be a positive thing, as it ensured consistency in their approach.  However, it raised concerns about inbreeding.  So I asked for clarification: did they never hire experienced analysts or was it just uncommon?  They responded that a few times they hired experienced analysts but they never worked out.  Their thinking had been too “contaminated” by the outside world and could not adjust to the culture of this firm.  So they “learned” from this experience that they shouldn’t hire experienced analysts.  I came to a different conclusion.

A manager who is serious about generating superior performance ought to be serious about self-assessment.  Such a manager should be driven to find tools and data which will enable objective self-assessment.  At the very least, they should benchmark themselves right.  If they don’t it is hard to take seriously any claims they make about how they generate superior performance.

References

Ambachtsheer, Keith P. (2007).  Pension Revolution: a Solution to the Pensions Crisis.  John Wiley and Sons.

Dennett, Daniel C. (2006).  Breaking the Spell: Religion as a Natural Phenomenon.  Viking Penguin.

James, William (1896).  "The Will to Believe."  New World.  Reprinted in Essays in Pragmatism, Alburey Castell, editior.  Hafner Publishing Company, 1966.

Minahan, John R (2006).  "The Role of Investment Philosophy in Evaluating Investment Managers: a Consultant's Perspective on Distinguishing Alpha from Noise."  Journal of Investing, Summer 2006

Porter, Michael. (1980). Competitive Stratergy: Techniques for Analyzing Industries and Competitors. The Free Press.

Rappaport, Alfred. (2006). “Dividend Reinvestment, Price Appreciation, and Capital Accumulation.”  Journal of Portfolio Management, Spring 2006

Schein, Edgar (2004). Organization Culture and Leadership, 3rd edition.  Jossey-Bass.

Slager, Alfred, and Kees Koedisjk (2007).  "Investment Beliefs."  Journal of Portfolio Management, Spring 2007.

Surz, Ron (2008).  “The Attribution Challenge.”  Chapter 26 of Investment Management in a Changing Milieu: The Noble Challenges of Global Stewardship, Ralph Rieves and Wayne Wagner, editors.

Ware, Jim. (2004). Investment Leadership: Building a Winning Culture for Long-Term Success.  John Wiley And Sons.

Waring, M. Barton, and Laurence B. Siegel (2006).  “The Myth of the Absolute-Return Investor.”  Financial Analysts Journal, March/April 2006. 

 

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