By Steven Goldstein
One of the outstanding stories to emerge from the Rio Olympics has been the success of the British team.
Team GB (to those who know and love them) finished second in the medals table, amassing 27 golds and 67 medals in total, a higher medal count than when they were Olympic hosts four years earlier, and beaten only by the US, which has a population over five times larger.
Britain hasn’t always been able to boast such impressive performance. Just 20 years earlier, at the Atlanta Olympics, the UK claimed just one gold medal, finishing a lowly 36th in the medals table with 16 medals in total.
This transformation in performance outcomes will doubtless become a case study for aspiring Olympic nations. For UK sport, it has been a journey characterized by a deliberate focus on the process required to deliver athletic excellence.
Focusing on process is the key to optimizing outcomes in any skilled activity, be it physical like sport, or cerebral, like professional investment.
Great performance in investment management is as much mental as it is intellectual, and arguably more so. After all, as Warren Buffett said, ‘Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.’
Behavioral attributes, such as mindset, mental strength, emotional control and focus are just some of the many qualities required for success in professional investing – and these qualities are shared by elite athletes.
And, just as Olympic athletes have coaches to help develop these attributes, so in risk businesses such as asset management, coaching can be used to help strengthen and fine-tune investors’ risk skills and behavioral risk capabilities – what we term ‘risk intelligence’.
Historically, this hasn’t been a focus area for the fund management industry. The induction processes and specialist training courses run by most investment firms focus on technical subjects, with little, if any, focus on improving the behavioral aspects of ‘risk performance’. This kind of learning and development has been, and remains, mostly experiential.
In a sense, this echoes how sport worked prior to what is known as the ‘Performance Revolution’.
The Performance Revolution can be traced back to the mid-1980’s, when individuals, teams and countries started to adopt new practices and methods of developing their talent. By the mid 1990’s, this revolution had taken a hold with the growth of advanced training facilities that employed new technologies and incorporated the rapid advances that had been seen in physiotherapy, sports medicine and sports psychology.
At the same time, coaching moved on from the guy with a tracksuit and whistle shouting motivational phrases, to being a highly integrative and professional activity that encompassed all stages of an athlete’s development and performance. Included in this, was a new focus on using data (as seen in Michael Lewis’ Moneyball) to strengthen recruitment and athlete training processes. The closer an athlete or team was to the top of their sport, the more they engaged with a whole team of coaches and data analysts to help gain the vital, often marginal, edge which translated to a huge competitive advantage.
Britain was late to this game. The spirit of the plucky amateur, putting in long hours of training, overseen by a general coach who worked with a stable of athletes was still very much the attitude in the UK of the mid-1990’s. Fast forward 20 years, and Britain has made a huge investment in top quality training facilities, high level performance coaching, and in-depth use of powerful analytical processes – all of which has paid off in an a quite astonishing way.
In many ways, the fund management industry, and the broader financial risk industry in general, are at a similar point to where sport was prior to the Performance Revolution.
Just as there were great sportspeople before that watershed point, so there are great fund managers today. However, the early adopters of new practices in sport gained a huge competitive advantage over their rivals. Now the same is starting to happen amongst professional investors: early adopters of new practices in both data analytics, neuroscience and risk psychology are realising measurable alpha gains, and trying to keep it quiet.
How big is this competitive advantage? Essentia Analytics has shown that it can help fund managers make an additional 50bps of alpha in a given year by mitigating behavioral bias. The probability of achieving those results year in and year out is enhanced by coaching.
Ultimately, the prize is consistent and sustained superior returns, more regular appearances toward the top of performance tables, and fund inflows.
One of the few pieces of research which highlights the potential from focusing on the human aspects of performance, was published by Citi Prime Finance in 2013. Citi looked at the effect of different human capital management practices within hedge funds over a three year period. They found that those firms that had a superior approach to supporting and developing their human capital outperformed rival firms that were less proactive in these areas by an average of almost 200 basis points per year. That is a staggering difference – and is consistent with what I have witnessed as a risk performance coach. The improvements in performance have been worth hundreds, sometimes thousands the value of the initial investment.
By way of an example: just last week I was informed by the head of trading at a firm where I coached a trader back in 2014, that for the second year running he has more than doubled his previous performance ‘run-rate’. Over the past two years, this adds up to additional revenue of more than $3.5 m compared to his previous long-run average performance level. To this firm, and for this individual trader alone, that represents a return worth almost 600 times the investment in coaching.
So what is stopping every single fund manager from joining the Performance Revolution as it takes hold in the investment industry?
New practices require out-of-the-box thinkers to lead the charge, as Billy Beane did in Moneyball. Status Quo bias, which leads us all to resist change, is a powerful force. Yet forces of technological disruption and increased regulation are forcing change to happen in this industry whether we like it or not.
As British athletics figured out belatedly, their leading sportsmen and women had huge untapped potential which could be realised with a more scientific approach to human capital management. The same opportunity exists for the investment management industry today.
By adopting an advanced performance improvement approach, which utilises performance data analysis in conjunction with coaching, the most innovative thinkers in asset management can propel themselves and their firms significantly ahead of the competition.