Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 392

Unfortunately, all fund manager presentations are good

Part of a portfolio manager’s role is generating inflows to their fund, raising new money and retaining clients by telling a captivating story. Month after month, year after year, the presentation skills are refined. For the most part, the managers enjoy the work, the enthusiasm is genuine and there’s always a story to tell. They are smart people, as becoming a portfolio manager requires a lot of study, time in the job, market analysis and experience, and beating others for the top gig.

They routinely update their professionally-designed Powerpoint presentations with charts that support a compelling narrative, and after adding a table showing a successful overweight stock position or two, they're off to the races. And don't forget to smile confidently and thank everyone for their attendance.   

Investors love stock stories

Most fund managers have talked the talk and walked the walk hundreds of times. They have the advantage of an interesting subject matter, especially stock stories. Even a fund manager who is underperforming across a portfolio of say 30 stocks will own a few big winners. Attend any conference where a fund manager is speaking about stocks and watch the audience members taking copious notes. People love stories about stocks, and fund managers feed the need by explaining how they are overweight a company which has doubled in price. It shows their skill in selecting companies, and retail investors hope the magic dust will sprinkle on them.

What is not said is that there are at least as many dogs in the portfolio, but let’s ignore them and focus on the good bits.

Combine long-term experience delivering a similar message, a subject matter that attracts a cashed-up audience and a public profile, and it’s a recipe for universally-strong presentations.

I attend a hundred of these events a year and I have probably heard a thousand in my life. I listened to three last week and they were all interesting. Based on what was said and no further research, I would be happy for any of the presenters to manage my own money.

And that’s the problem. There’s no such thing as a bad presentation and investors are left with unlimited choices. All Chief Investment Officers can make a convincing case that their fund is about to deliver strong results. Investors should not simply hand over their hard-earned on the basis of a presentation.

Magellan’s success after six years of presentations

Who is the highest profile and arguably most-successful portfolio manager in Australia? I nominate Hamish Douglass, who has built Magellan into a $100 billion investment powerhouse and introduced many market innovations. Hamish came from an investment banking background and was always a polished and persuasive performer. You would think a fund manager like Hamish would experience instant success and a big following from Day 1.

Magellan was established in September 2006, but it did not establish a meaningful reputation among advisers and retail investors for many years. I recall an early presentation in the Magellan office where Head of Distribution, Frank Casarotti, struggled to attract more than 20 people. It was social distancing before we knew the meaning of the words. As Casarotti describes in this article from 2016, Magellan did not have a month of retail flows over $50 million until 2012. That’s six years of excellent presentations and strong results before significant retail inflows were generated.

One reason for the slow inflows (and a little matter called the GFC) is that despite the quality of Douglass’s presentations, they were not materially superior to many others. It's difficult to really stand out in an impressive group. It was the combination of results and marketing over a long time which created the Magellan success story and the Douglass reputation.

Practice makes ... pretty good

In the mid-1980s, when I was Head of New Issues at the Commonwealth Bank, I undertook a fund-raising roadshow in Hong Kong and Singapore with Deputy Treasurer, Paul Skerman. We booked over 30 meetings in a hectic week, including breakfasts and dinners. Prior to the trip, we practiced our presentation several times, including where to pause, when to smile or nod, who would say what. Paul focussed on the big picture while I talked about the balance sheet and the transaction.

By the middle of the week on the road, I could have done the presentation in my sleep. Maybe I did, because after a couple of days, Paul asked me to smile more and look enthusiastic when he was talking. It was a good lesson. Approach every meeting as if it were the most important, as if the subject were fresh. We might hear the patter dozens of times but everyone else would only hear it once.

By the time we left Asia, we knew all the questions, all the answers, and it went like clockwork. It’s not that we were especially good presenters, but there was a lot of interesting material backed by plenty of practice. I’m sure it was a good presentation and the transaction went well.

What if a fund is underperforming?

Surely it’s not possible for a fund manager to make an impressive presentation if their fund does not have a good recent track record.

Paul Fiani founded Integrity Investment Management in 2007. He had previously shot to prominence while at UBS Asset Management when he took a strong stance against a private equity bid for Qantas. In the early years, Integrity won a number of awards and at its peak was managing over $5 billion.

I was at Colonial First State when we took Fiani on a national adviser roadshow, a prized role for any fund manager as the adviser exposure was unequalled at the time. However, Fiani had experienced a run of underperformance, as happens with all managers, and I was intrigued by how he would explain the poor numbers.

Fiani was a good presenter, and watching the advisers in the room, he held their attention as he talked the stock stories they all love. Then came the crunch slide on Integrity’s performance, but Fiani did not miss a beat. He explained that the best time to invest with a fund manager was not when they had just done well, as all their bets had already paid off. It’s when they have done badly, because investors gain exposure to companies before the share prices improve.

It was brilliant. He made the poor performance into a big plus, and the advisers around my table nodded their agreement. (Footnote: for various reasons, Integrity closed in 2017 and returned all money to its investors).

Value versus growth presentations in the current day

The last few years have challenged traditional ‘value’ managers who select companies based on fundamental assessments of intrinsic company value versus current market price. In contrast, ‘growth’ managers buy expensive stocks when they can see the future potential with profits in the distance. The best examples are tech stocks trading on extreme price multiples but with exciting prospects. Value managers argue they are priced for execution perfection and it’s better to stick to proven companies making real profits. Growth managers believe the dream.

Within the space of two days recently, I listened to a value and a growth manager and both were persuasive.

The growth manager was Munro Partners’ Chief Investment Officer, Nick Griffin. In this climate, growth managers are delivering impressive results and loving that their investment approach is vindicated. Munro’s Top 5 investments are Amazon, Microsoft, HelloFresh (food delivery), ServiceNow (digital workflows) and Taiwan Semiconductors. Strong results were also delivered for the portfolio by chipmaker ASML and Vestas Wind Systems. Munro’s investments are dominated by tech, climate change and e-commerce, and here are the strong results.

Griffin’s Global Growth Fund picks from the best companies in the world according to themes which he believes are changing the ways we live and delivering outstanding company opportunities.

It is a classic growth story, believing in the promise of the future, and Munro has enjoyed the market run with a handsome 34% return over the last year, a long way above its benchmark. Griffin has great optimism in market conditions over 2021 and his ability to select the winners.

The second presentation was by Schroders’ Martin Conlon who has been Head of Australian Equities there since 2003. A focus on the Australian market is a headwind in the current conditions, as the local market does not have the tech and health sector titans which have driven US markets. The broad Australian index was flat for 2020. Schroders is more of a traditional manager, which:

… seeks to focus on the fundamental risk inherent in a business and the way it is financed rather than focusing unduly on the range of emotional and non-fundamental factors which drive day to day share prices.” (Source, Schroders Wholesale Australian Equity PDS, 1 October 2020).

On 10 January 2021, Conlon wrote:

“There is some bitter irony in large pension funds observing the crazy punting of Tesla in the US by the Robinhood Army, only to buy it themselves at much higher prices when S&P tells them. Domestic poster children remained the usual suspects; Afterpay (+47.5%) and Xero (+45.7%) in tech, Polynovo (+75.6%) and Nanosonics (+41.4%) in healthcare, not to mention a healthy dose of lithium and rare earths. The durability and quantum of gains from some of these thematics continues to embolden investors. Our assessment of the odds remains one in which luck and a few hot hands are being confused with mastery of the game. It is behaviour creating the apparent value, not fundamentals.” (my bolding).

Last week, he presented two charts which show how current prices are frustrating his process. He said:

“Equity market returns in the past decade have transitioned from being earnings driven to ratings driven. Expansion in the rating attributed to earnings, or in some case revenues given the absence of profit and cashflow, has become the dominant driver of share prices. This is most evident in technology where multiples and valuations are almost certainly in bubble territory, however, most stocks with perceived growth in revenue and expectations of future profit growth remain priced at levels vastly above historic norms.” (my bolding).

This chart of market performance shows how earnings growth (the green bars) dominated returns from 1993 until the GFC in 2008, and how reratings (the blue bars, where the market is paying more for the same earnings) have generated returns more recently. 

Schroders also provided the following chart which shows: “The majority of winners have virtually no grounding in current revenue and profit."

And fair enough. It was a good presentation showing the market is overvalued and stocks have insufficient revenues to justify their prices. Conlon is in solid company with many prominent investors, such as Investors Mutual, Lazard and Maple-Brown Abbott, arguing the same point. At some stage, there will be a convincing rotation from growth to value and these managers will look vindicated.

How has Conlon’s fund (the dark blue bars below) performed versus its benchmark (the purple bars)? After fees, it is under its benchmark in each of the last three years, cumulatively by 6.4%. Market conditions have not suited this type of manager, and he has explained why. Job done and everybody is happy because he has stayed true to his style.

Investing is about the future

In two good presentations, one manager sees a bright future for many high P/E stocks and backs his growth thematics, while another sees investors pumping money into recent winners regardless of price and value, and at some stage, the market will come to its senses.

Who is right? I have no idea. Ask me in five years when we can look back on Munro and Schroders.

The point is that both presentations were impressive. What should an investor do?

  • Back the recent winner whose style will continue to pay off, or
  • Back the recent loser whose style is about to pay off.

So if you can’t tell from the quality of the presentation who to invest with, how do you select a manager? Co-founder of this publication, Chris Cuffe, has spent a career selecting managers, and his coverage of the subject is here and here and here. Chris primarily backs long-term performance and ignores numbers over less than three to five years. His ‘for charity’ multi-manager Third Link Growth Fund has outperformed its benchmark by 3.5% per annum compound since May 2008.

In the meantime, sit back and enjoy the fund manager presentations from an unlimited range. They are all good although not decisive in the investing decision. Lap up the stock stories (you know you love them, even if you’re not sure why or what to do with them), follow the pretty charts, hear the well-practised patter and nod sagely.

And if you do give the fund manager your money, consider it a 10-year commitment because that’s how long it will take before you know if they have talent or luck.

 

Graham Hand is Managing Editor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

 

10 Comments
Mic Smith
February 14, 2021

Thank you Graham, you have well explained an investment dilemma some of us face.
However I think we often focus on the wrong thing. As an example I have bought several houses to live in over the years and have been advised each time to get "building inspection reports" on each before buying. In all cases I have not bothered, seeing this of lesser importance and just used my own judgment. What I have done however is put a lot of effort into understanding the neighbors before buying a property to live in. I have spent days and nights just observing the street, with Friday and Saturday nights are particularly illustrative. You get to find out all sorts of things around noise, carparking, pets, visitors and neighbor behavior generally. Sounds odd, but has really paid off for me. Similarly I spend a lot of time getting to know the Fund Managers and CEOs and pay less attention to their presentations. There are numerous way to get to know them better, (parking outside their places of residence is not one of them), and this has paid off hugely for me in my investing. Seeing a fund manager presenting all togged up in a suit and tie with clicker in hand is like the spider saying: "Welcome to my web, you gullible little puffball". A guy called Phil Lynch wrote a book about it. On a broader canvas, Gough Whitlam when he retired from politics owned a car and unit only. Malcolm Fraser died in gentile poverty. (Both of course were helped by fat public service pensions). But my point is, both were economic klutzes in their personal investing lives. I will leave it to others to pass judgment on their public legacies.

Phil
February 05, 2021

I think these point in time performance tables are a big problem generally. Rolling returns, risk adjusted returns, returns against the actual manager's benchmarks ( vs a random general index), downside risk ratios, cumulative returns , growth in underlying income (ex Capital gains distributions) etc should be in each managers Monthly Fact Sheets in my opinion. Most advisers/retail investors make some major ( often incorrect) decisions based on those fact sheets, so increasing the information on them would assist everyone. The costs to report these may be high, but at the moment they are losing market share to passive because the value is not evident enough.

Ben Graham
January 31, 2021

Graham, solid article but no article on fund manager selection should exclude commentary on what proportion of the fund manager’s net worth is invested in their own fund. I’m sure if you asked Nick and Martin what they owned of their own fund the question of future performance would become clear.

Graham Hand
January 31, 2021

Hi 'Ben', thanks for the comments, that's a big subject. I'm sure every fund manager will say they are heavily invested in their own fund, but every fund manager is motivated for their fund to do its best, whether 10% or 100% of their net worth is invested there. Do we want fund managers with all their money in the fund such that they cannot sleep or function when it underperforms? That they cannot even relax in their own home? Do we want CEOs to have 100% of their wealth in their own shares so they work day and night and don't experienced a balanced life?

I don't like the argument that the more a fund manager is exposed to their own fund, the better they are likely to perform.

Tony Bates
January 28, 2021

Thanks Graham. I remember Jonathan Pain in the mid 2000's doing a dual presentation. I cannot remember what he called it but it gave the strong bull case and then immediately followed with the strong bear case using almost identical slides. His presentation was "on behalf of" Hedge Funds Australia. But I do remember coming away being quite attracted by both arguments. The US residential property market skyrocketing was one of the eye-popping slides. We all know what happened next. Thanks for your article. I won't be buying Tesla nor Afterpay at these prices and will encourage clients that own them to bank some of the profits

Jerome Lander
January 30, 2021

I was the other presenter at Jonathan Pain's presentation on that evening in around 2007 I believe, albeit mine was only a medium term bearish presentation. I still remember how great his presentation of both sides was then also Tony.

Fund of funds CEO
January 28, 2021

Depends on the audience, I suppose. I've dumped managers after 'good presentations' because they didn't give me any comfort that the actual investment process was sound. There has to be substance.

David Mc
January 28, 2021

Great article on fund manager presentations Graham

Jack
January 28, 2021

Maybe I'm more cynical but when a fund manager tries to explain why they completely missed the FAANGs, the companies dominating global commerce, I wonder if they know how the world is changing.

Tony Reardon
January 28, 2021

I use a number of fund managers, primarily through their listed entities including LICs and I choose particular managers/funds for their specific focus e.g. Australian mid-caps, International non-USA, etc. and aim at a spread of investments. I have attended numerous presentations and it is always interesting to hear from managers where one already has an investment. Interestingly I can recall coming home after a couple of these and immediately selling the relevant positions as it had been very apparent that the manager was focused on their other funds and not on my investment area. There does seem to be a tendency for some managers to run a plethora of funds perhaps aiming at simply being in the market place rather than having real expertise. My mistake for thinking one should use the same manager across different investment styles.

 

Leave a Comment:

     

RELATED ARTICLES

What game is your fund manager playing?

Why do investors earn less than the funds they invest in?

Who dares loses: Buffett on luck, taxes and a challenge

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.