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23-11-2011, 04:21 AM
Business Times - 23 Nov 2011
Experience vs education in fund management
Treadneedle chief says experience adds to fund performance
By TEH HOOI LING
EDUCATION or experience - which matters more in fund management? Simon Davies, executive chairman of Treadneedle Investments, who has 30 years of experience in the industry, says the scale tips slightly more towards experience.
Which is why if a scatter diagram of the members of his investment team was plotted, they'd be more on the side of experience. He has Treadneedle's track record to back up his claim that perhaps experience does add to performance.
In the last 16 years that he's been with Treadneedle, the firm's asset under management grew from £pounds;22 billion (S$45 billion) to £pounds;75 billion. And in the last five years, about 85 per cent of its funds are in the upper quartile of the performance survey - that's three times what one would expect in a random distribution.
In a talk at Singapore Management University's Sim Kee Boon Institute for Financial Economics recently entitled 'Education or Experience: Managing Funds Successfully', Mr Davies said in stock picking, one tries to win on two I's.
The first 'I' is information - trying to have better information, and to know more about the market than your competitor. The second 'I' is insight - trying to predict what will happen from here onwards.
In terms of information, some stocks are very well-followed and as such, very difficult to get any legal information advantage on.
But there are under-researched stocks and they do 'lend themselves to somebody with an educational background who is used to doing the sort of academic research'. 'So that's an area that I'd expect them to score.'
But even for well-followed companies, those who are academically inclined might be able to take all the available past data and manipulate them to get a better understanding of how a company truly works.
But Mr Davies has two caveats on this. He noted that people with finance background are obsessed with details. 'They'd built incredibly detailed spreadsheet models that missed the main points.' And, these people don't believe that anything can be dramatically mispriced.
However in general, education is valuable in the first 'I'.
As for the second 'I' - insight, here 'having experience of previous economic cycles is very very important in taking the right decisions'.
'For two or three hundred years, we've had the seven year economic cycles. So having a feel of how things play out is very useful. It's not necessarily insight or superior information. It's just knowing what usually happens.'
So the credit crunch should not have come as a surprise to anybody in that it happened. Banks have been doing this for centuries. The only surprise is the magnitude of it all, he added.
Experience tells you when things might go wrong, and what kind of things might go wrong.
Mark Twain defined a mine as a hole in the ground owned by a liar. That's because exploration companies tend to exaggerate their promises. 'Anyone who shows up with a nice new finance or geology degree might be caught out by these people.'
But Mr Davies has three caveats for his enthusiasm for experience. One, experience can be bad. He joined the investment industry in 1981 and he had colleagues who had worked through the 70s when everything that could go wrong, did.
'So they just filter out any positive idea, any view that the world economy could be a good place. They only wanted the bad news. And as the world economy got better and better, they were caught out.'
Another example. When he was doing economics, he and his classmates were told that wealth distribution was getting more equal. They were made to write essays on why this would be so, and why it would always be so. 'Just as the ink was drying on my essay, Ronald Reagan and Margaret Thatcher showed up with global capitalism.' The Gini Coefficient has widened significantly since.
'So experience can be bad if it's drawn entirely from a time which is no longer representative.'
The second caveat is that one doesn't actually have to live through the experience. One can read about them. 'If I have one criticism of modern business schools and economics department, it is that there's an awful lot of theory and not enough history.'
For example reading about the railway boom in the 19th century in the US would tell one that the ventures' return were all front-end loaded. The stocks' returns were all made when licences were given out, and the building of the tracks began. By the time people got on the trains, the stock prices had all been fully discounted. Similarly for the Internet boom.
And the final cavaet about experience. Something we just had no experience before. Globalisation today has no history. 'We are extremely enthusiastic about China, and what's going on there. But during this development, there's no roadmap, no history of a non-democratic communist country embracing capitalism and not changed its political system.'
But having noted the three caveats, Mr Davies still thinks experience is very important.
So which wins - education or experience? The beauty is, investors don't have to choose between the two, for you don't have to have just one person managing your fund. In the late 1990s and early 2000, the hype was to have a rock star fund manager with a dominant personality. Too many of the so-called stars have blown up.
'People are now looking at a more collegiate way of managing money. My advice if you ever end up running a fund management company is to get people to work together. Have some very bright CFAs and put them to work with people with years of experience. The key is that they must have mutual respect for one another's skills.
'As for your career, if you are educated, try to get as much experience as possible. You can fast track that by reading economic history.
'For investors, make sure the company you are buying products from has people with education as well as experience. This industry is not short of competition. It's not short of people who want to sell you services. So why should you accept second best?'
Other characteristics crucial in a fund manager are: having an open and inquiring mind; a competitiveness streak - always wanting to be one up against the other players; and being somewhat cynical, because fund managers 'spend our lives trying to sell us things they don't' want'.
Good judgement, said Mr Davies, is borne out of bad experience. Bad experience is borne out of bad judgement. Experience is good, provided you learn from them. All the presupposition of experience is that you actually learn from your bad experience.
Experience vs education in fund management
Treadneedle chief says experience adds to fund performance
By TEH HOOI LING
EDUCATION or experience - which matters more in fund management? Simon Davies, executive chairman of Treadneedle Investments, who has 30 years of experience in the industry, says the scale tips slightly more towards experience.
Which is why if a scatter diagram of the members of his investment team was plotted, they'd be more on the side of experience. He has Treadneedle's track record to back up his claim that perhaps experience does add to performance.
In the last 16 years that he's been with Treadneedle, the firm's asset under management grew from £pounds;22 billion (S$45 billion) to £pounds;75 billion. And in the last five years, about 85 per cent of its funds are in the upper quartile of the performance survey - that's three times what one would expect in a random distribution.
In a talk at Singapore Management University's Sim Kee Boon Institute for Financial Economics recently entitled 'Education or Experience: Managing Funds Successfully', Mr Davies said in stock picking, one tries to win on two I's.
The first 'I' is information - trying to have better information, and to know more about the market than your competitor. The second 'I' is insight - trying to predict what will happen from here onwards.
In terms of information, some stocks are very well-followed and as such, very difficult to get any legal information advantage on.
But there are under-researched stocks and they do 'lend themselves to somebody with an educational background who is used to doing the sort of academic research'. 'So that's an area that I'd expect them to score.'
But even for well-followed companies, those who are academically inclined might be able to take all the available past data and manipulate them to get a better understanding of how a company truly works.
But Mr Davies has two caveats on this. He noted that people with finance background are obsessed with details. 'They'd built incredibly detailed spreadsheet models that missed the main points.' And, these people don't believe that anything can be dramatically mispriced.
However in general, education is valuable in the first 'I'.
As for the second 'I' - insight, here 'having experience of previous economic cycles is very very important in taking the right decisions'.
'For two or three hundred years, we've had the seven year economic cycles. So having a feel of how things play out is very useful. It's not necessarily insight or superior information. It's just knowing what usually happens.'
So the credit crunch should not have come as a surprise to anybody in that it happened. Banks have been doing this for centuries. The only surprise is the magnitude of it all, he added.
Experience tells you when things might go wrong, and what kind of things might go wrong.
Mark Twain defined a mine as a hole in the ground owned by a liar. That's because exploration companies tend to exaggerate their promises. 'Anyone who shows up with a nice new finance or geology degree might be caught out by these people.'
But Mr Davies has three caveats for his enthusiasm for experience. One, experience can be bad. He joined the investment industry in 1981 and he had colleagues who had worked through the 70s when everything that could go wrong, did.
'So they just filter out any positive idea, any view that the world economy could be a good place. They only wanted the bad news. And as the world economy got better and better, they were caught out.'
Another example. When he was doing economics, he and his classmates were told that wealth distribution was getting more equal. They were made to write essays on why this would be so, and why it would always be so. 'Just as the ink was drying on my essay, Ronald Reagan and Margaret Thatcher showed up with global capitalism.' The Gini Coefficient has widened significantly since.
'So experience can be bad if it's drawn entirely from a time which is no longer representative.'
The second caveat is that one doesn't actually have to live through the experience. One can read about them. 'If I have one criticism of modern business schools and economics department, it is that there's an awful lot of theory and not enough history.'
For example reading about the railway boom in the 19th century in the US would tell one that the ventures' return were all front-end loaded. The stocks' returns were all made when licences were given out, and the building of the tracks began. By the time people got on the trains, the stock prices had all been fully discounted. Similarly for the Internet boom.
And the final cavaet about experience. Something we just had no experience before. Globalisation today has no history. 'We are extremely enthusiastic about China, and what's going on there. But during this development, there's no roadmap, no history of a non-democratic communist country embracing capitalism and not changed its political system.'
But having noted the three caveats, Mr Davies still thinks experience is very important.
So which wins - education or experience? The beauty is, investors don't have to choose between the two, for you don't have to have just one person managing your fund. In the late 1990s and early 2000, the hype was to have a rock star fund manager with a dominant personality. Too many of the so-called stars have blown up.
'People are now looking at a more collegiate way of managing money. My advice if you ever end up running a fund management company is to get people to work together. Have some very bright CFAs and put them to work with people with years of experience. The key is that they must have mutual respect for one another's skills.
'As for your career, if you are educated, try to get as much experience as possible. You can fast track that by reading economic history.
'For investors, make sure the company you are buying products from has people with education as well as experience. This industry is not short of competition. It's not short of people who want to sell you services. So why should you accept second best?'
Other characteristics crucial in a fund manager are: having an open and inquiring mind; a competitiveness streak - always wanting to be one up against the other players; and being somewhat cynical, because fund managers 'spend our lives trying to sell us things they don't' want'.
Good judgement, said Mr Davies, is borne out of bad experience. Bad experience is borne out of bad judgement. Experience is good, provided you learn from them. All the presupposition of experience is that you actually learn from your bad experience.
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