Given that we are in our 50th year of existence, Duncan Artus, who has been working at Allan Gray for over 22 years, reflects on what he believes makes a great asset management firm and considers whether Allan Gray exhibits any of these attributes.
Before going into the details, I must state that there is not only one way to manage money successfully. There are many examples of investors and traders with different philosophies and processes who have been successful. But what you do need is a method that you believe in. Why? Because if there is one guarantee in investing, it is that the market is going to test you, sometimes severely, and often in public. Despite all the financial and human capital that has been invested in the industry over time, investors tend to repeat mistakes. Minimising these mistakes should be high up on the priority list of anyone starting an asset management firm.
These quotes capture the sentiment of my approach:
“We would rather lose half our clients than our clients’ money.”
– Former Allan Gray portfolio manager and managing director Jack Mitchell (1998 - 2007)
“That is fine for Buffett to say with his private investor hat on, but those of us who have public investors and consultants looking over our shoulders don’t have the luxury of letting pitch after pitch go by. We have to swing.”
– Global investment strategist Barton Biggs
Below, I discuss the attributes that I think make a great asset manager over the long term.
Smart, hard-working people
It seems obvious that you would need smart, hard-working people to be successful, and many of our competitors, for whom we have great respect, would be able to make the same claim: Having the right people gives you the right to compete; a ticket to the game, if you will.
We put a tremendous amount of effort and time into our recruitment and the development of our people. Investment management is a human capital business after all. I have had the privilege of working with some of South Africa’s best investment minds, and there is no doubt that having great people increases your chances of attracting more great people.
The firm has successfully navigated multiple generations of investment teams.
The aim is to uncover those hyper-achievers who can generate investment outperformance. But this is much harder than it seems. For example, from the date I started in the Investment team in 2001, we have hired 94 analysts; only 14 have gone on to become portfolio managers across our equity and asset allocation funds.
Given our long-term approach, we spend a lot of time thinking about and planning for succession. The firm has successfully navigated multiple generations of investment teams. I think this is an unappreciated strength of Allan Gray.
A time-tested philosophy
Any asset manager needs an overarching philosophy that guides how they invest; a frame of reference that structures thoughts and actions. While necessary, this again merely affords you the right to compete; it is not a durable competitive advantage. You cannot trademark your philosophy, and plenty of books have been written about investing.
One danger of consistently identifying with a narrow definition of an investment philosophy is being pigeonholed into a certain “investing style” box by clients and making incorrect investment decisions for fear of those decisions being judged through a certain style lens. We actively think about this risk.
Our philosophy can be described as bottom-up, long-term and contrarian. However, we will take views on macroeconomic factors and markets at extremes. Extreme events seem to be occurring with greater regularity! I believe this is down to the increased financialisation and indebtedness of the underlying economy leaving it more vulnerable to shocks.
An enabling ownership structure
In my view, the most important contributing factor to success is the ownership structure of a firm. It is essential that it allow the investment team and the business to take a long-term view and stay the course during the inevitable difficult times.
As Jeff Bezos, the founder of Amazon, said: “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people, but if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.”
A lot of thought has been put into our ownership. The firm has always had a strong anchor shareholder via the Gray family interests and now through Allan & Gill Gray Foundation (the Foundation). We have remained unlisted, free from the external pressure of having to take short-term investment and business decisions to meet market expectations.
Aside from the Foundation and E Squared, a 17.8% owner of Allan Gray, our shareholders include senior current and former employees. They hopefully understand that investment performance goes through cycles and that outperformance is not generated in a straight line. This understanding is a critical part of our success.
… our profits are closely aligned with our clients’ investment performance. As they should be.
I believe the ownership philosophy, along with the investment process and incentives discussed below, strongly increases the probability of an average team producing above-average results. Of course, our goal is to have an above-average team operating within the enabling ownership structure.
A proven investment process
An asset manager should be able to demonstrate an investment process that has worked through a full investment cycle, i.e. through both a bull and bear market. They should be able to explain to an external party how a position entered the portfolio in a simple and concise manner. I am always reminded of something our former chief investment officer, Simon Marais (1998 - 2001), said on the topic: “If you cannot explain why you own a share in less than five minutes, you probably don’t know why you own it in the first place.”
I believe our process has stood the test of time over the last 50 years through all kinds of investment and economic cycles. Of course, no process remains static over such a long period. We tweak and improve it incrementally, which eventually compounds into an endurable competitive advantage. The ability to adapt has become even more important as technology progresses at an ever-faster rate, generating an ever-increasing amount of data. This has decreased the signal-to-noise ratio for many investors.
I thought the following numbers might illustrate the output of our process: For the decade to the end of 2022, the Investment team had 5 344 company management meetings, wrote 9 375 investment notes and 1 607 fundamental reports. All of these are stored on our systems for input into our current research effort and for reference for future investment teams. This valuable intangible asset is not on our balance sheet.
… our staff’s incentives are directly linked to the outcomes we deliver for our clients. This close alignment has been a key part of our culture and success.
Firm and staff incentives that align with client outcomes
Charlie Munger of Berkshire Hathaway famously said: “Show me the incentive and I’ll show you the outcome.” I have seen very little in my career to contradict this statement. Many of the problems in, and the often-poor reputation of the financial services industry (especially post the global financial crisis of 2007/08) can be traced back to poor incentives. A clear understanding of the incentives of an asset manager and its staff and the alignment of those incentives with client outcomes are key.
The investment industry will look very different in 50 years’ time, but with the foundations put in place over the last 50 years, I have confidence that Allan Gray will successfully navigate its way there …
Our founder, Allan W B Gray, held the underlying belief that we should walk in the same shoes as our clients. If our clients are doing poorly, then so should the firm, and vice versa. That is why a significant portion of the client assets we manage is subject to performance fees. There is no perfect fee structure as there are always trade-offs, but our profits are closely aligned with our clients’ investment performance. As they should be.
Current and past senior Investment team members and operational executives own a mixture of equity in the business and a share of the firm’s profits. Some of these benefits can continue to accrue well past departure. This encourages long-term thinking and succession planning.
We also operate a broader staff scheme across the firm. The fortunes of the firm are linked to the performance of our clients’ investments, and those of the staff are linked to that of the firm. The result is that our staff’s incentives are directly linked to the outcomes we deliver for our clients. This close alignment has been a key part of our culture and success.
Representing clients’ interests
An asset manager should represent its clients when engaging with the management and boards of companies. Allan Gray does not own shares directly in the companies we invest in – our clients do. They are the beneficial owners, and we represent their interests in meetings.
Allan Gray has a long history of standing up for shareholder rights if the situation demands it, both to grow and protect value as Raine Adams and Nicole Hamman discuss in their article. We spend a significant amount of time analysing the governance and incentive structures of the companies held in our portfolios and giving input where appropriate. I believe this has added value to the portfolio over time. Please see our Policy on Ownership Responsibilities and Stewardship reports.
Being a responsible corporate citizen
This can mean different things to different people, but investment management is a business inherently built on trust. An asset manager needs to act and be seen to act with the highest integrity and ethics. I believe Allan Gray can make a positive contribution to our industry, the economy, broader society, and therefore the countries in which we do business. For many of our staff, including me, the knowledge that, thanks to our founder, a significant portion of our profits is used for philanthropic purposes makes our jobs feel more purposeful.
History suggests that outperformance over long periods is extremely difficult to achieve, and competition only increases over time. As a result, I believe that each unit of alpha, or outperformance, generated today is more valuable than when I embarked on my investment career. You can only outperform if your portfolio looks different from the market and many of your competitors’. This involves clear career risk. In my opinion, striking the balance between being humble in knowing how difficult it is to outperform, and having the confidence to be contrarian without being arrogant, is perhaps the most important skill an investment manager can have.
I have been fortunate to have worked for Allan Gray, an asset management firm that I believe aligns with the key attributes discussed above. The investment industry will look very different in 50 years’ time, but with the foundations put in place over the last 50 years, I have confidence that Allan Gray will successfully navigate its way there – wherever “there” may be.