On the day we discover that UK asset managers were the only ones to avoid the reported global pay dip in the sector in 2016, Sophie McIntyre reviews worrying new research about the link between personality and pay-off
What traits should you look for in a fund manager - a lack of imagination and a modest, Methodist disposition?
According to a study of 1,774 hedge-funder-owned vehicles in the US one should only entrust one’s money to a man or woman so sensible that they would choose to own a seven-seater people carrier (rather than an Aston Martin Vanquish).
Four researchers from the US and Singapore found that hedge fund managers who owned sports cars (defined as ‘low small usually two-passenger automobile designed for...high-speed driving’) were not a safe bet for managing your money. These hedgies took on proportionally more risk than their ‘minivan’ driving counter parts. And created lower returns as a result.
Indeed, sports car drivers were seen to take on 16.61 per cent more investment risk than those who shunned the vehicles. Owners of sensible cars guaranteed the least volatile rate of return. This translates into an 11.74 per cent reduction in risk relative to other managers. ‘We argue that the purchase of a powerful sports car signals the intent to drive in a spirited fashion and therefore conveys a propensity for sensation-seeking,’ claim authors Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo.
Moreover, ‘sensation seeking’ exotic-car drivers are likely to ‘succumb to overconfidence’, which, say the authors, is viewed as a negative.
It’s a persuasive study, but do we really want to sit down for lunch at Bellamy’s and discuss our portfolios with a manager whose small-talk repertoire includes the number of bicycles he can stack in the back of his Renault Espace?
Fortunately, a different school of thought comes to the rescue…
Another paper has suggested that overconfidence is, in fact, a pre-requisite for survival in the world of investment. ‘We find that neither under-confident nor bearish sentiment can survive. On the other hand, investors with moderate overconfidence or bullish sentiment can survive in the long run,’ says F. Albert Wang of Rice University, Houston, n his paper Overconfidence, Investor Sentiment, and Evolution.
The same study also indicates that the ‘growth rate of wealth accumulation drives the evolutionary process’. So, the ‘overconfident’ are, in fact, crucial to the growth and development of the financial sector.
Wang’s argument is corroborated by trader performance coach Steven Goldstein, who believes that while certain people have personalities that predispose them to taking risky decisions, these traits can be tempered by tailored training techniques. Depending on where your personality type places you on Goldstein’s ‘risk compass’ (which spans personality types through from ‘wary’ to ‘adventurous’), managers can adopt strategies to balance their personality and give them an ‘edge’ in their work.
So what does the man at Mayfair Ferrari think? ‘If you have a fund manager who’s an old fuddy duddy and drives a Bentley or a Rolls-Royce they might have a very different outlook on life from someone who drives a sporty new car,’ opines salesman Max Girardo. ‘Owning a two door sports car doesn’t mean that someone is reckless.’
And, on a slightly pedantic note, it seems that the initial, critical study by Brown et al neglects to take into account four door performance cars. Drivers of a Porsche Panamera Turbo S (top speed 191mph) or the solid Bentley Flying Spur (top speed 200mph) could most certainly indulge in a little bit of risky business. If you take high-speed four doors into account then there might not be any managers left that you can trust.
So if you want a manager with verve, confidence and an innovative disposition, don’t be afraid of horse power -- whether it comes with two or four doors. Speed, as they say, is of the essence…