“A Practitioner’s Insight on Manager Selection” by Ms. Geeta Kapadia, CFA

Contributed By : Tarun Gopal

The term “Manager Selection” is always a buzzword in the universe of institutions like Pensions, Insurance, Foundations, and Endowments etc., as this decision pretty much defines the fate of their Investment goals. To share some insights and best practices, the Delhi chapter of CFA Society India organized a session on Manager Selection on 9^th Aug 2019, which was conducted by Ms. Geeta Kapadia, CFA. She’s a senior Investment strategist at Yale New Haven Health System, where she is responsible for assets under management (AUM) of approx. $3 billion.

In this session, Ms. Kapadia shared some valuable insights of how she and her team select the manager for their Investment portfolio at Yale New Haven and most importantly what they look for in these managers which form the basis for their judgment.

The session started with Ms. Kapadia’s three golden mantras that they look for in the managers at Yale New Haven and the associated questions, which one needs to address before selecting/ rejecting a manager. These were as follows:

1. Experience:
   • How long have they managed or been managing assets?
   • Over what cycles have they managed these assets?
   • What sort of firms do these portfolio managers have worked in the past?
   • Do they have experience in owning and managing a firm?
   • What are their personal management/ mentoring styles?
2. Alignment:
   • What’s the client base of this manager? How long have their longest clients been on board?
   • Does the firm have an advisory board and who’s on it?
   • How do their investment professionals get compensated?
   • How are fees determined and shared?
   • What is their strategy’s stated capacity and has it changed?
3. Edge:
   • What does the manager say which makes them different? And what are the factors which actually makes them different?
   • Which other manager(s) have a similar process/ philosophy?
   • What differentiates this manager from its peers in terms of performance and strategy?
   • What do their clients and competitors do?

Ms. Kapadia emphasized that these were the general considerations which everybody should look for.” But even these considerations don’t define the success and desired goals of the portfolio”, she added. She then went on and shared some examples from her personal experience where this selection process didn’t work and defeated the purpose. She also shared the lessons she has learned from these instances which has guided in her career.

Manager A: PM Failure

Background:

• This manager was one of the top 50 hedge fund which was founded in 1991 and was operating as Fund-of-fund in U.S.
• Firm was handling around $3 billion of AUM through a single office.
• This was a focused small team, managing assets for many years together.
• In 2013, founder and CIO were charged with solicitation.
• Afterwards, the firm continued business as usual.
• Firm then experienced immediate redemption and shut down in 2014.

Lesson Learned:

All the due-diligence in the world cannot guard against one-off events.

Since these events doesn’t form part of the due-diligence process it’s hard to predict events like these which could affect the manager’s reputation and triggers redemption.

Manager B: Headline Risk

Background:

• This manager was also with a hedge fund which operated as Fund-of-fund in U.S., with $98 billion AUM and growing.
• Firm was frequently in news due to a Managing Partner’s interest in politics.
• In 2017, Trump White House announced that this Managing Partner would join the administration.
• A sale of this Manager B firm to two Chinese financial firms was announced in 2017.
• Managing Partner stepped down from his role at Manager B firm to join the administration.
• The announced sale was then cancelled and Managing Partner returned to the firm.
• These news triggered redemptions resulting in liquidation at unfavorable terms.

Lesson Learned:

Uncertainty breeds more uncertainty.

With this example, Ms. Kapadia stressed on the uncertain events which could spoil the investment goal that you have been framing with a particular manager, with just a headline in the news or bad mouthing. She also stressed upon some additional due-diligence related to key personnel of a manager and their associated outside interests, such as politics, which could deviate that manager’s focus entirely and could further hurt the investment goals.

Manager C: Headline Risk

Background:

• This manager was with a hedge fund focused on credit long/short investing.
• Firm was little known to the retail investors with $4 billion in AUM.
• In 2019, a Bloomberg article came out raising concerns about the founder and Portfolio Manager.
• Firm denied allegations made in that article.
• Bloomberg then made few small corrections.
• By this time, most of the damage was already done.

Lesson Learned:

It’s better to give up some upside rather than be the last one out of the door.

With this example, Ms. Kapadia shared her learning of not just focusing on upside potential of returns with the manager, but rather taking a timely judgment call to get out of the relationship.

Manager D: PM Departure

Background:

• Portfolio Manager(PM) and supporting analyst team had recently joined a large, global investment management firm with a parent company in U.S.
• This PM was highly regarded and was considered as a star PM in the investment world.
• Kapadia and her team personally went to congratulate him and his team.
• PM acted as a boutique team within the large firm, but this wasn’t a sustainable arrangement from parent company’s perspective.
• PM attempted to negotiate with the firm.
• None of the analysts were senior enough to lead the team in absence of PM who had decided to depart by that time.
• Redemption then quickly followed the news and the firm had to close its strategy.

Lesson Learned:

Consider who the ultimate owner of the firm is and what their incentives are.

With this example, Ms. Kapadia stressed upon the importance of not following a particular person for the investments objectives, in this case the star PM of the firm. Always consider the scenario and the impact it might lead to the investment performance in the event of departure of these key personnel.

With these examples, Ms. Kapadia reflected again their own factors which they consider at Yale whenever they have to select a manager for their portfolio. These are Experience, Alignment and Edge. In addition to this she also shared that they usually look for the managers who are comparatively smaller in size and are operating under the umbrella of around $2 billion of AUM.

Overall, this was a great and informative session where participants had an amazing interaction with Ms. Kapadia. Many of them asked their real life issues they face in their own professional arena and asked for her opinion and how she would have handled those scenarios.