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This Essentia article originally appeared in the CFA Institute blog, The Enterprising Investor.

Clare Flynn Levy, CEO & Founder Essentia Analytics

Clare Flynn Levy is CEO & founder of Essentia Analytics. Prior to setting up Essentia, she spent 10 years as a fund manager, in both active equity (running over $1bn of pension funds for Deutsche Asset Management), and hedge (as founder and CIO of Avocet Capital Management, a specialist tech fund manager).

Foreword by Clare Flynn Levy

I received a great piece of advice back in the 1990’s when I first started out in London as a young fund manager at a large European asset manager:

“Clare, great fund managers are made, not born. Investment decision making is something you will always be able to improve upon, and the day you stop being interested in that improvement is the day you should find another occupation.”

A lot has changed since that day, but that advice has never been more relevant.

The active management industry today is buffeted by the rise of passive strategies and insistent calls for higher transparency and lower fees. Not a day goes by without some new article predicting the demise of the human-led fundamental investment managers.

Despite these headwinds, I believe that fundamental investors will not only survive in the future, but thrive.

Research has shown that human brains are still far better than computers when it comes to making the finely balanced judgment calls required in complex and ever-changing financial markets.

This advantage is increasingly supported by the asset management industry’s growing adoption of data-driven feedback loops, similar to those employed in professional sport and other high-performance activities.

Many of today’s managers realize that there’s no longer a competitive advantage to being smarter than everyone else or even having access to better information. All that has been commoditized. What’s left is “behavioral alpha” — the excess returns that can be generated by “knowing thyself” and being more focused on self improvement than the next person.

Today’s most thoughtful investors have a wealth of experience to share with the next generation of fund managers. Each offers a different perspective, but they all share a focus on the importance of learning and reflection.

What makes a good fund manager? A willingness to learn, from your own success and failures, but also from the wisdom of those who came before you.

With that, I’d like to thank the Essentia clients, Essentia Insight Partners, and members of the investment community for their contributions below.

Ben Wallace, fund manager, Janus Henderson

  • Always invest in your own fund. It shows investors you are aligned with them and focuses the mind.
  • Bad news is almost never ‘in the price’.
  • Always be open to hearing views that are the opposite of yours.

Ben Wallace, fund manager, Janus Henderson

  • While raising capital, it helps immensely to run the strategy with real money or, if that is not possible due to size and instrument size constraints, then as a time-stamped paper portfolio. Then send short weekly letters/portfolio metric summaries to prospective investors with a short comment on views and portfolio changes. Even better, include your auditor on the mailing list. This goes a long way to getting investors comfortable with your strategy, shows your thinking in real time, and keeps you in touch with markets while you’re building the business.
  • Risk management, risk management, risk management. Come up with a well-structured framework that fits your trading style/strategy/psychology. What you lack in experience, make up for with additional structure, process and transparency towards your prospective investors. Show them how you hold yourself accountable to your risk framework.
  • Document as much as possible of your investment decision making process. This will allow you to make improving tweaks to your process and allow for learning and adaptability to different market regimes.

Pascal Kummert, portfolio manager and CIO, Calvion Capital Management

Gunther Kramert, senior portfolio manager, Union Investment

  • Be skeptical, be critical, and make up your own mind. As a portfolio manager, a lot of people tell you a lot of things. But they may have motives that are not necessarily to your benefit (even when they seem convincing, or are convinced themselves), and they don’t necessarily know the truth any better than you do.
  • Do not get overconfident. Stay disciplined and be prepared to reflect on your personal shortcomings and deficiencies. If you’re not prepared to acknowledge these realities, and seek to improve on them, you have a competitive disadvantage.
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