The Extra Dimension
This essay appeared in Citywire Selector on November 21, 2012.
Many professional investors will not consider investing in a fund until they ‘see the whites of the portfolio manager’s eyes’ and ‘press the flesh’. Despite all the technological advances that have made remote communication seamless, it is as important as ever to meet in person.
Meeting with a manager directly, we learn things that cannot be picked up in any other way. Through a personal encounter, investors are able to make the judgments needed to gain a sense of confidence, trust and commitment.
Manager meetings inform two specific areas of how investors make decisions. One we might describe as primitive and ‘bodily’, the other is sourced from highly advanced brain functions and therefore described as ‘intellectual’.
Keynes was on to something
The resurgent interest in Keynes’ discussion of ‘animal spirits’ has illustrated the importance of human psychology in financial markets.
It has been shown that these basic psychological ‘drives’ are at the root of how we behave; we rarely act in a purely rational manner. Behavioural finance is now accepted as central to understanding investors’ motives and reactions.
Fund selectors are investors in human capabilities and talent. Much of our developing opinions and judgments about portfolio managers stems from how they are perceived through personal meetings.
Our ‘animal matter’ and how we interact directly with one another in a physical space is an important part of the encounter.
Close up and personal
The Hidden Dimension is a thought-provoking book written by Edward T. Hall some 50 years ago. It is best described as an anthropological study of, amongst other things, the implications of physical social distance on how humans interact with one another.
Hall goes into fascinating detail about the physical attributes we are able to perceive about one another in direct meetings. These ‘perceptions’ inform our opinions and understanding.
Hall tells us that, at a distance of about a meter, ‘details of the other person’s features are clearly visible…fine details of the skin, grey hair, “sleep” in the eye, stains on the teeth, spots, small wrinkles… noticeable feedback from the muscles that control the eyes’ are perceivable.
At the same time, we can smell body odour, perfume or cigarette smoke. We can easily detect subtle changes in voice tone indicating nervousness or irritation.
But surely, professional fund investors don’t rely on animal instincts? Well of course they do. Think back on some of the manager meetings you have attended. I will bet that some, if not all of this, rings true with your experience.
As you sit attentively listening to the words being spoken, you begin to notice something about the speaker’s physical actions or attributes and how they may or may not confirm your confidence in what the manager is saying. These are the physical cues one might pick up on in a meeting – sometimes falsely we must note. But they are there nonetheless. For instance:
Those beads of sweat? Why is this manager so nervous?
Lots of gray hair. Market experience or the stress?
Relaxed attitude, comfortable body posturing. Confident… but maybe too confident?
Body language between portfolio manager and analyst. Who is doing what, do these two really work well together?
The physical cues a professional fund investor gets from a manager, when consistent with the overall story, makes for a choice you can have confidence in.
But fund selection is not all animal instincts. Like investment management itself, picking a fund manager also depends on a wide array of analytical skills.
The core of the meeting with a portfolio manager is about content. As distinguished from the bodily dimension, the ‘intellectual’ nature of the face-to-face meeting with portfolio managers focuses on what the manager says. Consistency is key – meeting the manager helps to confirm or deny the story that has been told about the fund by others from the company and through various published documents.
Importantly too, investors feel like they need to ‘meet the trigger puller’. They seek to get an intellectually consistent sense of the manager. Does he say what he will do, and do what he will say? The question is best answered through a direct dialogue.
We are wired to be more trusting of someone when they speak with us directly in person. Further, there is a universal appreciation for the sense of commitment felt when someone makes themselves available to address tough issues.
A careful compromise
Alas, for fund selectors there is a conflict to resolve. While each investor wants to meet directly with the portfolio manager, this is neither practical nor in the best interest of investors in the fund overall. The more time a portfolio manager spends in meetings, the less time they have for managing money.
Digital tools such as video conferencing and recorded videos are quickly becoming paramount in bringing fund investors closer to portfolio managers. Increasingly sophisticated and well informed sales teams, product specialists and client portfolio managers have come a long way in filling gaps for introductory meetings and updates.
Events, such as those put on by Citywire, have made huge strides in making the efficient meeting of managers and professional fund investors possible.
Ultimately, personal representatives of the fund company, websites, print marketing and product documents must all project the voice and personality of the portfolio manager. The better they are able to do this, the more time the manager has to focus on producing alpha. It’s a delicate balance to strike, but it’s one worth pursuing for all concerned.