At the most recent IMI Consultants’ Congress in NYC, several panelists discussed their evaluation process of investment managers and their products for both the defined benefit and defined contribution markets. One of the prevailing areas of focus was the consistency of both the investment process and the “insights” that they are trying to capture and exploit.
There has always been this great concern emanating from the consulting community about changes to a manger’s investment process and stock selection elements. In my former life as head of Invesco’s Quantitative business, we were always being challenged by consulting firms when discussing an evolutionary change in model weights or stock selection factors. But, why?
One of the real special aspects of the investment management industry is the abundance of very bright and intellectually curious people. Great ideas can and will be arbitraged away over time. Either because a firm is not cognizant of their idea’s natural capacity or they refuse to adhere to it, or because other firms “stumble” on their secret sauce.
No process will remain robust if it doesn’t evolve. What consultants should be doing in their evaluation process is to challenge investment advisors to reveal their research agendas related to the ongoing evaluation of stock selection criteria. Experience should account for something, so what do you know today relative to what you knew or didn’t years ago? Also, ask if these firms monitor the effectiveness of their insights on a regular basis. We would suggest that firms adhere to certain disciplines without truly knowing whether or not they still have predictive ability.
Passive management has been eating the lunch of active managers in recent years. There are many reasons for this, and we would suggest that active managers will once again have their day in the sun, but they don’t do themselves any favor by not challenging every aspect of their investment process on a regular basis. Finally, asset consultants who can’t embrace change will be picking yesterday’s winners!