Year-end reflections from the investment floor…

Year-end reflections from Chief Investment Officer Pierre-Henri Flamand on the secrets of a successful investment floor.

We’ve just been through the process of our quarterly and year-end reviews at Man GLG, when we analyse performance of our portfolio managers, discuss their successes and their failures, and set goals for the year ahead. It has been broadly a favourable year, although that’s not always the case. It was Churchill who said that the secret of success is going from failure to failure without a loss of enthusiasm, and while we would obviously prefer it that our portfolio managers were right all of the time, part of the skill of this job is knowing how to negotiate the down days, weeks and even months that we all – at some point – experience.

I’ve been Chief Investment Officer at Man GLG for a little over a year now, and like a football manager whose playing days are behind him, my job is to use the too many years of experience that I’ve had as a portfolio manager to help our team make the very most of their various skills. Often this means talking through the intricacies of an investment strategy – and sometimes just a single word at the right time can help make the difference between success and failure. It’s why I like to be present on the investment floor, to be available for conversations, to advise, to challenge, encourage and support.

It’s an old market saw that even the best investors are only right 55% of the time. I believe successful investing is as much about how you position yourself with regard to your correct decisions and your mistakes as it is about getting those decisions right in the first place. This is something that only comes with experience, but it’s a lesson that we try to instil in our portfolio managers early in their careers – think hard about how you size up those positions in which you have the greatest confidence and how you risk manage those positions which go against you. I believe it’s about helping people to build on their successes and move on from their failures. If you get this right, you can potentially forge a successful business from being correct 55% of the time.

It’s also important that we encourage our portfolio managers to think about why positions result in losses, and whether there’s anything they can seek to do to help mitigate any risks that lie outside their areas of expertise. This is something we’ve worked hard on over the past few years: isolating idiosyncratic risks so that we play to the strengths of our managers.

As an example, let’s say that a PM in our European team identifies an Italian bank that he/she thinks is dramatically more attractive than its peers. Let’s say this bank has gone through a successful restructuring, has hired an impressive new CEO, has cleaned up its balance sheet and is demonstrating positive earnings momentum. Now let’s say the PM goes long this bank and short a leading US bank. The next day, Brexit happens, or there’s some other European-specific disturbance. The Italian bank drops 25%, its peers drop 35%, and the US bank is down 2%. Now the manager was perhaps right about the bank, but was blindsided by a macro risk he/she hadn’t anticipated. I want to be able to talk with our PMs about the merits of a specific investment case rather than about the noise that surrounds it. I believe, the more we are able to hedge out the extraneous factors that can complicate an investment decision, the more clearly we’re able to focus upon the potential advantages and disadvantages of the trade. We never want our portfolio managers to be forced out of positions for the wrong reasons.

Subtler, more intuitive interventions are also part of managing an investment floor. We’ve just relocated our offices from the West End to a light-filled building overlooking the Thames and London Bridge, consolidating all of Man Group’s UK investment businesses under one roof. The investment floor here is larger and brighter than it was in Mayfair, and we’ve taken advantage of the move to think about the way the floor is arranged. There are two things that are of prime importance when it comes to an investment floor: lines of communication and levels of energy. We have a vast range of experiences, talents, specialisms and personalities on the floor and I want to make sure that we seek to generate the maximum number of ideas possible from these varied worldviews. It’s amazing what can come from seemingly off-the-cuff conversations, and we’ve thought hard about the way that information and ideas move from person to person around the investment floor.

You can tell as soon as you walk onto an investment floor whether it’s a place of energy and creativity. Our floor has always had a buzzy atmosphere and I think that’s partly down to the way people are positioned. It’s also due to the large number of young people around. We can all get stuck in our ways when we’ve been on the floor for a few (dozen) years and we encourage the young people we hire – whether through our Graduate Scheme or not – to question and challenge the received way of doing things. It helps keep us on our toes and make sure that we never sink too far down into the wells of our particular specializations.

Next year will doubtless have its own challenges to overcome, its share of contributors and detractors. Success will be as much about how we react to our decisions, including (perhaps especially) the bad ones, as about the decisions themselves. With that, I wish you a restful break and a prosperous and inspiring 2018.