I picked this from an online investment forum. It’s a response given by someone to a question asking how can one identify fund managers who will generate “reasonably consistent alpha”. I have lightly edited it for clarity.
I don't know if there is any surefire way to pick successful fund managers and I don’t claim to have such a process. But I have the belief that I can identify good fund managers. Whether that belief is well-placed or misplaced- that's the big question.
I have been an equity fund investor for almost 28 years and over those years, there have been 18 individual fund managers with whom I have invested through both bull and bear markets. In terms of what I am aware of and remember of their ability to generate alpha, 15 have been good, 2 were just about okay, and one was a failure. Personally I find that rate of success to be frightening and I suspect that I have been very lucky. But despite deep introspection, I haven't been able to convince myself to change my belief. What will happen in the future is anybody's guess.
Obviously, when I started investing there was little or no process in the way I selected fund managers. It was only after 4-5 years of investing that anything resembling a process emerged and that evolved over the years. For the last 17 years, that process has remained roughly the same with no need to make any major changes. I don't know how good that process will be going forward or how useful it would be to someone else but since you have asked, I'm sharing it with you.
Firstly, I believe that the fund house is more important than fund manager and my rule is that the fund house where I put my money should meet my standards of fairness, honesty, predictability and customer friendliness and should be run by people who inspire confidence within me.
When it comes to fund managers, my first rule is that I will entrust money only to someone whom I have met or have seen and heard (in a meeting or on video). The second rule is that the person should have experience of a severe bear market, preferably with the same fund house that he or she is currently with. The third filter is that the fund manager should have a fair degree of humility. I avoid fund managers who behave like sales people and I avoid fund managers who make confident predictions.
Beyond this, I apply a variation of Munger's four criteria to determine the competence of the fund manager: knowledge, patience, discipline and objectivity. Since I am not an expert, I can only look for indications of knowledge. Similarly, I may only be able to see clues of patience, discipline and objectivity.
Lastly, I go by my instinct. It does not substitute the above criteria but it has the power to veto the above criteria and reject a prospective fund manager.
