John Minahan, PhD, CFA, is a Senior Investment Strategist at NEPC, a Boston-based investment consulting firm.  This article is adapted from the forthcoming book Investment Management: The Noble Challenges of Global Stewardship.  This book will be available in September, 2008.  For more information, inquire at farjones@q.net.

See the related article by John Minahan, Do Cultural Biases Inhibit Performance?: The Case of Style Boxes

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When I evaluate an active investment manager, I usually try to uncover what I can about the manager's belief system, for two reasons.  First, an active investment process is designed to exploit a manager’s beliefs about how superior performance is generated, so understanding the manager’s beliefs is central to judging the manager’s investment process.  Second, I want to know how proactive the manager is about using the available tools to self-assess his or her investment process and beliefs.  At the very least I want to see managers with adaptive belief systems, and if they are proactive, all the better.  While I don't have any hard evidence that adaptive or proactive belief systems affect performance – perhaps some data gathering is appropriate here – I have more confidence in managers that actively wrestle with learning and improving using whatever tools they can get their hands on, formal or improvised.

Talking about beliefs is difficult.  Most managers are not accustomed to doing it in a substantive way.  Consequently, approaching the topic directly (“So, what are your investment beliefs?”) will likely generate superficial responses.  It is better to let managers tell their story on their own terms, and then seek opportunities to ask follow-up questions which flow from the manager’s story, but which also serve the purpose of shedding light on the manager’s belief system.  Often, simple questions such as “why do you think that?” or “why do you expect that to continue?” can go a long way to uncovering a manager’s beliefs.  Other times using concepts from capital market theory to frame one’s questions increases the mileage of the inquiry. 

However the conversation goes, in the end I would like to have a sense for the content of the manager's beliefs and for the process by which the manager manages their beliefs.  Let me discuss each:

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