Over my career, I have spent a significant amount of time speaking with Institutions, Advisors, and Individuals about their process of identifying and investing in expert fund managers. Based on those conversations, I believe that the vast majority of capital allocators do not know what they are doing.
True expertise is demonstrated only by measurable, consistently superior performance. But that creates a paradox for capital allocators. Investment managers who have long track records of superior performance are hard to invest in, mainly because everybody else also wants to allocate capital to them. Genuinely skilled capital allocators must identify expert managers before it becomes obvious to everybody else that they are experts.
Fortunately, the field of academic study called "Expertise Studies" offers valuable tips on identifying experts in advance. The field focuses on analyzing experts and expert performance. It draws from psychology, cognitive science, education, statistics, and other disciplines to show how expertise is developed, maintained, and measured. (If you'd like to dive deeper into what it takes to achieve expert status, check out the bibliography below.)
Using concepts from Expertise Studies, we can identify high-quality emerging investment managers before their expertise becomes evident to everybody else. The effort does not require evaluating a track record of superior performance (something that is easy for everybody else to recognize). Nor does it allow space for cognitive biases. Instead, the process seeks qualifiers correlated with budding expertise and predictive superior performance. Those qualifiers are:
Expert investment managers (like gifted artists, piano players, and craftspeople) tend to have a mentor or renowned teacher who influenced and shaped their advancement. Not only do experts have accomplished mentors, but they also have routines that allow them to hone their skill sets through time. Through practice and repetition, the emerging experts seek to match and exceed their mentors. The emerging expert can easily recite areas where the mentor had a view, and they improved upon it.
The other common aspect amongst experts is that they may make mistakes, but only once. They learn fast and eliminate actions that lead to mistakes. The expert creates a system of measurement and drives towards continual improvement. When identifying experts, especially money managers, this is the approach that capital allocators should follow.
If a capital allocator is lucky enough to find a fund manager with years of superior performance and the capacity to accept new allocations, they should jump at the opportunity to work with them. The decision is especially easy if that outstanding performance pairs with the qualifiers listed above.
Sadly, even some of the most venerable investment institutions are ill-equipped to find expert managers. That knowledge and process gap has created real problems for too many people. I discuss some of these risks in the recent 16 Insights About Wealth Creation and the Wealth Management Industry.
At BIP Capital, we help investment advisors, individual investors, and institutions develop a system to spot and engage expert managers. While we give in to some bias – as students of our craft, we gravitate to other managers who share our commitment – we rely heavily on objective indicators like data and process. Our team engages decades of earned knowledge as investors and principles from Expertise Studies to capture the benefits of superior performance. (Please ask us to demonstrate these proofs with data.)
