The similarities between Marathon runners and Fund Managers

With the London Marathon only days away, people across the country will be adding an extra bowl of pasta to their dinners in order to get the energy needed for the big race. The many attributes that these runners require in order to take on the mammoth task of running 26 miles and 385 yards are also required by fund managers across the city in order to deliver the required outcomes for their investors.

The point that all marathon runners fear is the dreaded 'wall', where sudden fatigue and loss of energy hits the body making any movement let alone running difficult. Many runners aren't able to deal with this pain and give up, while others fight through the pain and make it to the finish line. Similarly no fund manager is immune from difficult periods, however unlike other mangers, which have fallen by the way side, the fund managers mentioned in this article have survived their 'wall' and bounced back stronger.

Preparation is Essential Oyster Continental European Selection

Every runner who stands on the start line this Sunday should have put in the hard training, pounding the roads of their local streets, so that they are prepared for whatever hits them on race day. Michael Clements, fund manager of the Oyster Continental European Selection Fund, and his team conducts exhaustive preparation when analysing potential investments. The research work is a collaborative approach that is undertaken by the whole team. They focus in particular on the downside risk of a company's business model, its financial strength and what it is currently worth. Anecdotally Mr Clements has said that some ideas can take six to seven weeks from proposal to acceptance, as research notes are challenged and then re-challenged. Even when an idea is accepted, the security may not enter the portfolio, as Mr Clements is happy to wait until the stock is appropriately priced. This extensive preparation has proved beneficial, as, since Mr Clements took over the fund on 1st September 2014 to 31st March 2016, the fund has returned 15.3% compared to the MSCI Europe ex UK index that has returned 3.8%.

Consistency is Key Majedie UK Equity

Consistency is an attribute that every marathon runner needs. If they try to sprint the first miles then they may never make the final mile. But a runner who paces himself over the entire course will be able to reach the finish line. Fund selectors also look for consistency, not just in a fund's process, but also their performance. Since the Majedie UK Equity fund was launched in March 2003, a number of UK funds have had stellar quarters or twelve-month periods and have then spent subsequent years at the bottom of the pile. However the team of Richard Staveley, Chris Field, Matthew Smith and James de Uphaugh, who run the Majedie UK Equity fund, adopt a similar process to a marathon runner. They aim to deliver, through a flexible investment approach, a sustainable level of outperformance, and one that is not at the mercy of any particular investment style. This is based on the simple ethos that markets are inherently inefficient and therefore long-term active management can provide investors with superior returns. The team's philosophy has been proven to work as the fund has outperformed the FTSE All Share, in 95.9% of all rolling three-year periods from launch in March 2003 to 31st March 2016.

Bounce Back Ability Legg Mason Brandywine Global Fixed Income Fund

During the lengthy training period before race day, all marathon runners will experience bad sessions in the wind and the rain, with thoughts of 'why am I doing this?';. The strong marathon runners will be able to bounce back from these bad sessions and become stronger, fitter and more motivated.

As mentioned previously, no fund or fund manager is immune from underperformance. The fund managers that have provided significant alpha over time have been able to bounce back from periods of underperformance and subsequently outperform.

1995 was when David Hoffmann and Stephen Smith first managed a Global Fixed Income mandate at Legg Mason Brandywine, and over this period they have experienced periods of underperformance and market turbulence. In 2008 the Legg Mason Brandywine Global Fixed Income Fund underperformed its Citi World Government Bond Index by 16.33% (-7.43% v 8.90%) due to the funds exposure to investment grade corporate bonds and mortgage backed securities, as risk assets came under significant pressure in the wake of the global financial crisis. However the team had the resilience to bounce back from this tough period by outperforming by 17.64%, 5.34%, 2.16% and 3.41% in 2009, 2010, 2011 and 2012 respectively. The rebound in the fund performance was driven by the fund’s local currency government bond allocations to US treasuries, Australia and New Zealand. The team also learnt from the mistakes they made in 2008, by changing the mandate in 2010 to an investment grade sovereign bond only fund, removing any corporate bond and mortgage backed securities. *All Returns are in local currency terms, net of income reinvested.

Keep the faith Schroder Tokyo

The mentally tough marathon runner would have learnt to trust that their body will know what to do when it's race time , and have faith that their training plan has ensured they are able to complete the arduous task of a marathon. The mentally tough fund manager will also have trust in their team and faith in their process. Without this trust and faith, a fund manager may doubt every decision they make, causing poor decision-making, unnecessary trading and a few extra hairs may be found at the bottom of the plughole. Andrew Rose, fund manager of the Schroder Tokyo fund since April 2004 has consistently remained faithful to his process even when short-term performance has been poor. In 2005, he believed that the market had a very narrow focus and a sharp rally in reflation beneficiaries seemed hard to square with the economic developments that were taking place. Mr Rose had faith that his process was telling him that Japanese valuations seemed unrealistically high. This scepticism initially hurt the fund, as in 2005 when it returned 32.59% compared to the 41.88% from the TOPIX. However in the long run Mr Rose's faith in his process has rewarded investors, with the fund outperforming its benchmark by 12.65% over the seven-year period from 31st December 2005 to 31st December 2012.

All returns unless stated are in GBP term net of income reinvested. Source: FE Analytics and Square Mile