The most overlooked factor in picking a good fund?

What fund managers could learn from Jeremy Clarkson

There’s a factor in fund selection that’s serially under-analysed. I know this because I’m a fund selector and for years I serially under-analysed it.

I rarely hear other fund pickers discuss it, while the fund managers themselves hardly mention it either. And yet, if we don’t understand it, we risk misjudging a fund’s capacity to outperform.

That factor is relationships.

OK, that sounds a bit Sesame Street. So let’s restore balance by turning to Jeremy Clarkson.

Love him or loathe him, you can’t deny Clarkson’s TV programs are hits: Top Gear was a global ratings monster, while Clarkson’s Farm is Amazon Prime’s most popular show in the UK.

Who is the star of these shows?

‘Jeremy Clarkson’ would be your not-unreasonable answer. But while you wouldn’t be entirely wrong, you wouldn’t be entirely right either. The real star is the relationship between Clarkson and his various sidekicks, and I can prove this scientifically(ish): Clarkson co-presented the original Top Gear for years in the 1990s, but with only modest success. He then relaunched the show in 2002, but changed the format, and it became a global sensation.

What did he change?

It used to be a man telling the camera about a test drive. The new format switched focus to Clarkson’s bantery relationships with his sidekicks, and the crowd went wild.

Clarkson’s Farm carries this on. Yes, it’s taught me facts about farming, but that’s not what keeps me coming back. The real draw is the mucking about with Caleb, Lisa & co — the farm is just an inviting backdrop.

In the fund industry, we’re still behaving like pre-revamp Top Gear. As fund buyers we too often assume that, just because a fund has one named manager, that it’s a one-man show (for yes, it is still usually a man).

As fund managers, meanwhile, we give our clients a dry monologue about our funds’ features, but ignore the interplay between team members — an aspect that’s just as enlightening but far more compelling.

To be clear, I’m not talking about fund management resources here. We’re all over that: Rare is the slide deck that doesn’t contain a flow chart of approachable-but-serious-looking headshots. You know the one: Fund manager on top, a few analysts underneath, each sat on a job title and some titbits on tenure and job spec.

No, what I’m talking about are the invisible lines between those headshots. Lines that, if they had labels, would say things like: ‘X takes the credit, but Y gives him his best ideas’; or ‘X resents Y as she openly challenges him, but can’t get rid of her as she’s usually right’, or ‘X knows Y is terrible at analysis, but Y always backs X in meetings and is handy at golf’.

If you work in a team, you’ll recognise these dynamics. You’ll also know how hard it is to understand them, particularly as an outsider. They simply can’t be explained by 30 seconds of boilerplate.

The trouble is, relationships between people are even more complex than the people themselves. You can get your head around a team of eight individuals, particularly when condensed into dry stats about experience and tenure, but relationships are another level: This is because the number of team members grows on a linear basis (i.e. one by one), but the number of relationships grows exponentially. Your team of eight already contains 28 relationships (count them), but if you add one more person it rises to 36.

Any of these relationships might be crucial to the fund’s success. The lead manager, for example, may have the charisma and the big ideas, but it’s his cautious, introverted co-manager who, by tempering his excesses, frequently prevents disaster. If we don’t appreciate this subtle dynamic then, when the analyst quietly exits, we’re suddenly holding a ticking time bomb.

It’s particularly important to shine a light on the manager’s relationships with their analysts. This illuminates a whole spectrum of manager-analyst interactions. In my experience, some managers treat analysts as a homogenous, idea-generating resource, while others integrate them into the portfolio management process. While some managers admit that, while their deck shows five analysts, they only trust two.

This complexity is, perhaps, why many fund researchers don’t get into this: The subtleties of human relations don’t fit on a spreadsheet, which makes them inconvenient for data-heavy selection approaches.

Or could it be that we’re still operating on a pre-internet mindset? We haven’t clocked that, because the world has become infinitely faster and more connected, even the most talented of stock pickers needs a team, consigning the lone-wolf, alpha-male approach investment to history (if it ever truly existed).

Whatever it is, we need to get better at examining, understanding and explaining team dynamics. Mostly because we’ll improve results but, even if we don’t, we’ll have more fun trying.