Is overconfidence a curse for the top performing managers?

By Joshua Thurston - Citywire

Although ‘past performance is not a guide to future returns’ is the familiar refrain trotted out, we continue to deify top-performing managers and many are willing to talk about the drop off in a fund’s track record being solely down to their investment style being out of favour.

However, what very few talk about, but perhaps should, is whether the emotional state of a manager following a period of great performance is linked to their downturn. 

‘It is one of the trade secrets that we never talk about, the emotional rollercoaster that is the job,’ said Alan Custis, the Citywire A-rated Lazard Asset Management managing director and portfolio manager.

The first question worth asking is whether a fund manager’s overconfidence really can have an impact on returns.

‘Success does breed a degree of confidence. Time and again with high profile managers, if your stock selection has not been working, you intuitively become more risk averse; it is very difficult to stop yourself going that way,’ Custis said.

‘If you have had a good period of performance, you are more inclined to take more risk in the portfolio and those are effectively the seeds of the next downturn in your performance.’

Accept your limitations

In their discussion paper ‘Overconfidence in Investment Decisions: An Experimental Approach’, Dennis Dittrich, Werner Guth and Boris Maciejovsky, from the Max Planck Institute for Research into Economic Systems Strategic Interaction Group, stated that overconfident managers are often found to overestimate the precision of their knowledge. They are more confident of their predictions in fields in which they have self-declared expertise.

Latitude Investment Management’s Freddie Lait certainly thinks overconfidence can adversely affect managers.

‘What I often say is: overconfidence is quicksand for reason in the financial industry,’ he said.

‘When you become that overconfident and you have had some success, you stop doing the things that you knew were rational when you were struggling or when things were a little bit harder or more balanced.’

This is not to say he sees confidence in itself as necessarily a bad thing, however.

‘Confidence is very good, but overconfidence can be very bad, so what we say is we are highly confident in the process, but that does not mean that you should be overconfident in each individual investment.’

Trust the process

According to Lait, the way to avoid falling into the trap of overconfidence is by sticking to your investment process no matter what.

‘Suppose you and I have a £10 bet on the role of a die: if you roll one, two, three or four you win and if I roll a five or six I win, you should take that bet. But, on a single dice roll, you cannot be confident, because there is a third of a chance you will lose all of your money.

‘However, over 100 rolls you can be exceptionally confident and you could almost guarantee that you were going to win. That is the way we think about process.’

Dittrich, Guth and Maciejovsky’s findings seem to support Lait’s view on the importance of process. They demonstrated that the overconfidence of investment managers also increases with the complexity of a task. Therefore, it follows suit that sticking to a singular process can help fund managers rein this in.

Lait said: ‘We have a process that has all of the building blocks that should give us a better chance of success or should give us four out of six on that dice roll. That is how you conquer overconfidence, so you are detached from each individual investment.’

The right team

Beyond relying on a process, Waverton fund manager Will Hanbury says that surrounding a manager with the right team can really help.

‘We do suffer from confirmation bias; we tend to look for arguments that support our views,’ Hanbury explained.

‘People have a tendency to love or hate things and when you are in investing, this can be very damaging, especially with people holding stocks that have done very well.’

Hanbury is backed up by behavioural finance research which, as Arman Eshraghi and Richard Taffler explain in their ‘Fund manager overconfidence and investment performance: evidence from mutual funds’ study, assumes investors are often subject to behavioural biases that can negatively affect their financial decisions.

Eshraghi and Taffler go so far as to suggest ‘the investment industry as a whole, and fund trustees in particular, can also benefit from introducing some type of psychological screening in the fund manager selection process’.

They point out that the hiring of fund managers is traditionally heavily dependent on the manager’s past performance record, when more detailed profiling of individual’s thought processes and behaviours in different scenarios would be more beneficial.

‘We argue that by adding certain psychological attributes to the list of critical factors in hiring fund managers, investment companies can raise their chances of recruiting more “successful” managers,’ the pair wrote.

‘Psychometric tests attempt to measure the abilities, attributes, personality traits and various skills of the candidates under consideration for particular vacancies.’

Challenging established views

Aside from this, one way Hanbury highlighted to mitigate excessive self-confidence in fund managers is by having a team of analysts who can genuinely challenge their established views.

Custis agrees, pointing out that having an analyst’s input is clearly a counterweight, noting a committee of one is not as good as a committee made up of a number of people when it comes to making a decision.

Although the danger of becoming overconfident is present, Custis does see the job itself as self-regulating to an extent.  

‘What you have is a job in which your periods of complacency are comparatively short, because as night follows day, you know what you have is going to stop working at some point.’

He said that even during a patch of good performance, managers can be certain that it will not last forever, as investing in the markets is like investing in a living organism and every-day things change.

‘So you are trying to constantly work out what it is that is going to change and how your portfolio will be impacted as a result of whatever changes keeps us/me awake at night. That’s the job,’ he added. 

Witan backs Latitude in quest for next star fund manager

Witan (WTAN), the global ‘multi-manager’ investment trust, has begun to back the next generation of fund managers with a new mandate to boutique Latitude Investment Management.

The investment represents the first in a new category under which Witan chief executive Andrew Bell and investment director James Hart can invest up to 2.5% of their £1.9 billion portfolio in up-and-coming fund managers.

Bell and Hart are allocating around 0.7% of Witan, or between £10 million and £15 million, to Latitude, which was founded by global stock picker Freddie Lait (pictured) in 2016. Lait who formerly managed the Odey Atlas fund, received backing from Odey Asset Management to launch the business and took the fund with him, which has since been renamed the Latitude Horizon fund.

The fund targets lower volatility and takes a high conviction approach. It currently allocates around 45% to equities, with the remainder in other asset classes. Latitude Horizon has returned 4.7% over the 12 months to the end of March, which compares to 1.7% by the average fund in the flexible sector.

The Witan mandate will be based on the global equity portion of the Latitude Horizon fund but won’t be an exact mirror, Hart said.

Hart added that the allocation does not reflect a desire to increase global equity exposure, but rather is a way to get exposure to a fund manager at an exciting stage in their career.

'One of the reasons we started thinking about this is because there are a number of managers – around London, the UK and the rest of the world – who are at a similar stage in their development but are quite far below the radar. It is not easy to find really talented people who have not hit the headlines,' Hart (pictured) explained.

The new position will sit in Witan’s ‘direct holdings’ allocation, which has been the best performing part of its £1.9 billion portfolio in the past two years. It is anticipated that the new allocation to rising stars will be spread across two to five managers.

‘This is no compulsion for us to use this, but it is an opportunity for us to take advantage of investing with managers who are newly established or not well known at this stage,’ Hart said.

The team is willing to invest in managers who may not have a long track record or have recently set up their own business where they are impressed with their process and intellectual rigour.

Witan’s existing global equity exposure comprises of mandates run by Lansdowne Partners, Pzena and Veritas. Last year, the team reduced the number of global managers in the portfolio from five to three , after selling out of MFS and Tweedy.

Over the past five years, Witan's share price has risen by 94.8%. This compares to a 125% increase by the average fund in the Association of Investment Companies' global sector. 

Witan currently trades at a 1.2% discount to net asset value, which compares to an average discount of 1.4% across the global sector.

Witan hands mandate to boutique investment manager

Witan Investment Trust has made an initial investment into a global equity strategy run by Latitude Investment Management.

The allocation, which was between £10m-£15m, follows the announcement in Witan's annual report of its plans to allocate up to 2.5% of its assets in smaller mandates to more recently-established third party firms.

The trust runs £2.1bn on behalf of over 25,000 investors using an active multi-manager approach, typically using around ten different investment managers.

The allocation to Latitude, which was spun out of Crispin Odey's Odey Asset Management in 2016, was an investment in the firm's absolute return-focused Global Long Only Equity strategy.

Witan investment trust appoints Crux AM and SW Mitchell to run new European mandate

Latitude's CIO and founder Freddie Lait said the allocation "builds on our marketing efforts to date, and our desire to have a diversified client base across both wealth managers and institutions".

He added: "The Global Long Only Equity strategy is a great opportunity to broaden our offering to clients and we have received very positive feedback on our fundamental investment process."

Witan Investment Trust invests in Latitude Investment Management’sGlobal Long Only Equity Strategy

24 April 2018, London - Latitude Investment Management (‘Latitude’), the investment boutique founded by Freddie Lait in 2016, is pleased to announce that Witan Investment Trust (‘Witan’) is investing in Latitude’s Global Long Only Equity strategy.

Witan’s investment follows the publication of its Annual report in which it said that up to 2.5% of its assets may be allocated in smaller mandates to third party managers which are more newly- established.

Witan is one of the UK's largest investment trusts, managing £2.1bn on behalf of over 25,000 investors via a multi-manager structure.

Freddie Lait, CIO and Founder of Latitude, said: “‘I am delighted that we have won this institutionalmandate. It builds on our marketing efforts to date, and our desire to have a diversified client base across both wealth managers and institutions. The Global Long Only Equity strategy is a great opportunity to broaden our offering to clients and we have received very positive feedback on our fundamental investment process.”

Latitude was founded by Freddie Lait to pioneer an innovative strategy tailored to meet the risk profile and return objectives of institutional investors and private wealth managers. The investment strategy follows an absolute return framework with the belief that diversified portfolio construction, combined with strong risk control, generates the highest available risk adjusted returns.

Latitude Investment Management announces appointment of Alex Robins as Head of Institutional Clients

Latitude Investment Management, the investment boutique founded by Freddie Lait in 2016, is pleased to announce the appointment of Alex Robins as Head of Institutional Clients.

Alex brings 18 years of industry experience to the firm. Prior to joining Latitude Investment Management, he was Senior Product Manager at Sarasin & Partners LLP, and before this he spent 13 years at J.P. Morgan Asset Management as a Client Portfolio Manager.

The appointment follows a successful 2017 for Latitude Investment Management. Since the firm’sinception in November 2016 the Horizon Fund has returned 11%, a compound return of 8%, resulting in first quartile performance against its peers and substantially ahead of inflation at c.2.5%. The assets under management at the firm have more than trebled over the same period.

Freddie Lait, CIO and Founder of Latitude Investment Management, said: “We are pleased that Alex has joined the team. We’ve been impressed with the demand from investors since we launched,and Alex’s appointment will continue to build on this recent momentum. I am certain that his extensive experience will prove highly beneficial to Latitude over the years to come.”

Alex Robins commented: “I’m delighted to be joining the team at Latitude. In a world of low returns and high volatility, the fund’s absolute return strategy is an exciting prospect for institutional investors.”

Latitude was founded in April 2016 to provide long only investment strategies for institutional and private wealth investors. The Horizon Fund charges a 1% management fee and no performance fee.

Tesco and Booker shareholders give marriage blessing

By James Davey, Alistair Smout

LONDON (Reuters) - Tesco’s 4 billion pound ($5.5 billion) takeover of Booker was overwhelmingly backed by shareholders of both companies on Wednesday, clearing the final hurdles to the creation of a new powerhouse in Britain’s 200 billion pounds-a-year food market.

A company logo is pictured outside a Tesco supermarket in Altrincham northern England, April 16, 2016. REUTERS/Phil Noble/File Photo

Investor approval, which followed the regulatory green light in December, means the cash and shares deal to combine Tesco (TSCO.L), Britain’s biggest retailer, with Booker (BOK.L), the country’s largest wholesaler, is set to complete on March 5.

The support is a personal victory for Tesco Chief Executive Dave Lewis, who stunned the market in January 2017 with an agreed deal with Booker that was originally valued at 3.7 billion pounds.

He won the argument despite dissent from some Tesco and Booker investors and from his own board, with critics on both sides unhappy over the price being paid and the potential for the tie-up to disrupt operations. The late Richard Cousins resigned in protest as senior independent director at Tesco in January last year.

The takeover is the boldest move yet by Lewis, who took over in 2014 shortly before an accounting scandal plunged Tesco into the worst crisis in its near 100-year history.

Booker says shareholders back Tesco takeover at scheme court meeting

At a general meeting of Tesco investors, 85 percent of votes cast approved the deal. At two Booker shareholder meetings - a scheme court meeting and a general meeting - 84 and 83 percent respectively of votes cast backed the takeover, easily passing the required 75 percent threshold.

“The successful approval of the Booker deal levels one of the main pillars of uncertainty surrounding the Tesco investment case,” said Freddie Lait, chief investment officer and founder of Latitude Investment Management, a Tesco investor.

Shares in Tesco closed up 1.8 percent, while Booker was up 1.6 percent.

“By coming together Tesco and Booker will be able to unlock growth in the food industry in a way that neither could do so easily alone,” Tesco Chairman John Allan said at the retailer’s meeting in central London, attended by just 65 shareholders, with most votes cast by proxy.

Already the dominant player with a 28 percent share of Britain’s retail grocery market, the takeover provides Tesco with greater access to the “away from home” part of the food sector - something that angered competitors who failed in their attempts to convince regulators to block the deal.

That market is worth 85 billion pounds and growing at over 3 percent a year.

Tesco also expects the deal to provide pretax synergies of 200 million pounds per annum after three years.

Booker serves 450,000 caterers and small businesses, and counts chains Carluccios, Wagamama and celebrity chef Rick Stein as clients. It also owns about 200 cash and carry warehouses and supplies 120,000 retailers, including the Budgens, Londis, Premier and Family Shopper chains, which are run as franchise operations.

‘JOINING FORCES’

The combined business will on Monday kick off a plan that Allan said was called “Joining Forces”.

An initial 90-day program would carefully bring Tesco and Booker together. “They are both performing very well at the moment, we don’t want to do anything that will actually take the wheels off either business,” he said.

Allan also reassured investors the deal was not the start of a buying spree. “It’s an important move which we will get the best out of over the next few years before we think of moving on to anything else,” he said.

Tesco’s move on Booker has, however, sparked more consolidation in the UK grocery market as supermarkets seek additional sources of growth and uses for excess capacity in their supply chains.

Last year the Co-operative Group (42TE.L) bought the Nisa convenience chain, while Morrisons (MRW.L) sealed a wholesale supply deal with the McColl’s (MCLSM.L) chain.

 

M&A Boom Fuels Spin-Offs

Corporations are spinning out parts of their businesses to boost performance as the equity bull market (despite recent volatility) drives the appetite for deals.

Groups including Dutch telecommunications group Altice, US conglomerates Honeywell  and General Electric, UK oil major BP and French luxury group Kering are considering setting up independent companies for some of their activities as a way to generate value for shareholders.

While spin-offs or spin-outs are not new, analysts have linked increased interest in them to a burst in mergers and acquisitions activity.

“The general boom in M&A drives spin-out activity for two reasons,” says Freddie Lait, managing partner at Latitude Investment Management. “First, companies who believe their stock is undervalued, often because they have a few distinct businesses within their company, can spin off a division and unlock some of the part’s value. The second is that, when enacting large-scale M&A, regulators often enforce competition rules which require tweaking of the corporate structure.”

According to Deloitte’s 2018 M&A trends survey, more than 60% of US executives said they expect the number and size of deals to increase. Seven in 10 said they plan to divest businesses in 2018 because of financing needs and changes in strategy.

“M&A activity globally is very high, which is common in the late stages of an equity bull market as both private equity and corporate owners look to cash in on rich valuations,” Lait explains. Despite recent signs of higher volatility and occasional pullbacks, most analysts don’t see an end to the bull run anytime soon.

Another appealing factor to spin-offs is that they tend to perform well. “Investing in spun-off businesses is frequently a strategy which outperforms the market,” says Lait.  “Provided the businesses are straightforward and you can understand the logic for why they have been spun out, [it is] a smart place to look for value ideas in an otherwise expensive market.” 

S&P Global Market Intelligence ‘Altice USA Shares jump as investors look forward to independent future’

Investors seem to be optimistic about Altice USA Inc.'s future as an independent entity. 

Shares in Altice USA ended the day up around 10% on Jan. 9. Altice NV said late Jan. 8 that it plans to sell its 67.2% interest in Altice USA to Altice NV shareholders, structurally separating the companies. Altice USA CEO Dexter Goei explained during a Jan. 8 conference call that the split, set to close sometime in the second quarter of this year, will "significantly simplify the way each group operates" in terms of responsibilities and decision-making processes, a change that Goei believes will "add significant value."

According to multiple analysts and industry observers, the primary benefit of the transaction is that it will shield Altice USA from the difficulties the parent company has been facing with its European operations. "The Altice NV story, particularly in France, was problematic," MoffettNathanson analyst and long-time cable analyst Craig Moffett said in a Jan. 9 research note emailed to clients. He noted that the European business has been aggressively cutting costs to better compete in the French wireless market, leading to misses on revenue growth and heightening concerns about Altice NV's heavy debt load, which ended the third quarter of 2017 with €49.56 billion in net debt.

According to Moffett, Altice NV's debt had come to cast a dark shadow on Altice USA due to "concerns that the U.S. might somehow be called upon to bail out a weakened European parent."

Pivotal Research Group CEO and Senior Media and Communications Analyst Jeffrey Wlodarczak agreed, saying one of the "biggest overhangs on the U.S. business" was "the potential for the struggles in the French business to bleed into the U.S. business." He added that the spinoff "eliminates that issue."

Kagan analyst Tony Lenoir said there were multiple reasons to believe the time is now right to separate the U.S. and international business, noting that Altice NV's debt load has been "weighing heavily on the group's share price in the last six months." In terms of the planned spinoff, Lenoir explained, "I think Altice's top brass decided it was time to insulate Altice USA from the difficulties the conglomerate, Altice NV, is facing across its international footprint, particularly in Europe." Kagan is a research group within S&P Global Market Intelligence's technology, media and telecom offering.

But Freddie Lait — founder and chief investment officer at Latitude Investment Management, a boutique firm focused on global stocks that follows a long-only investment strategy — noted that the move not only stands to benefit Altice USA but also will help Altice NV.

"This spinoff will certainly go a long way to steady people's nerves and to allow [Altice founder Patrick] Drahi to continue to expand in the areas where he wants to in a more balanced way. The debt levels have been a real concern to me and other investors, and to see an attempt to reduce this burden is a clear positive," Lait said in an interview.

In connection with the split, Altice USA will distribute a special dividend in cash of $1.5 billion, of which Altice NV will receive €900 million. Altice Europe will use €625 million, or 69%, of its proceeds from the Altice USA special dividend to repay debt, while retaining €275 million on its balance sheet. "Altice Europe will remain highly disciplined and will not pursue any meaningful stand-alone M&A opportunities and will use excess cash flow to reduce its indebtedness position," Dennis Okhuijsen, who will serve as CEO of Altice Europe after the split, said during the Jan. 8 conference call.

One question for investors following the U.S. cable business is whether the company will pursue further M&A in the near future once the spinoff is complete. Asked about the company's plans during the conference call, Goei said that while the company is "long-term ambitious" about consolidation, "There's clearly no near-term focus here on M&A."

In the immediate future, Goei said Altice USA will remain focused on building out its fiber-to-the-home network. The cable company has announced plans to build a fiber-to-the-home network over a five-year deployment schedule that began in 2017. Altice expects to reach all of the cable footprint it acquired from Cablevision Systems Corp. and most of the footprint it acquired from Suddenlink Communications during that time frame. In addition, Altice USA is moving forward on its plan to launch a wireless offering through its mobile virtual network operator agreement with Sprint Corp. With the MVNO set to launch later this year, Goei said, "We have a lot of other stuff going on internally, [and] we don't want to take our eye off the ball."

But Goei also did not rule anything out. "To the extent that medium-term things become open to us, of course we'll be looking at it," the CEO said.

A quick guide to diversifying your investments

By Freddie Lait at Latitude Investment Management | Thu, 19th October 2017 - 12:21


Diversifying your investments is easier said than done, but do it you must. In order to generate sustainable long term returns investors must do more than simply ride trends or invest in the latest exciting themes.

Choosing a variety of investments will ensure a more stable and predictable source of future returns, especially when focussing on stocks which are fairly valued, have high quality business models and strong industry backdrops.

Beyond that, investors need to consider further diversification through their asset allocation. This deserves an enormous amount of thought, far more than it often receives. Various academic studies point to the fact that more than 80% of portfolio returns come from asset allocation. Below I offer a simple way to frame the thought process and some tips for specific non-equity strategies tailored to your specific portfolio.

Behaviourally we are all loss-averse, albeit to different degrees. At Latitude, we are consciously quite risk averse and aim to construct portfolios which, under normal circumstances, shouldn't suffer worse than a 10% drawdown. And by normal, we don't mean "except for the bad bits".

We invest with the permanent expectation that there is always the potential for unforeseen events in the near future which could cause stock markets to fall 30% or more. Indeed, over the last century stocks have lost more than 30% in value roughly once every decade, and we need to be prepared for that.

Without the power of diversification, this fact would imply a target allocation of c.30% in stocks and the remainder in cash, a very unsatisfying position. A portfolio with this allocation (assuming no alpha from successful stock picking) would have generated negligible real returns in the long term, assuming average returns from equities of 8-9% versus a long-term inflation rate of 3%. We need to do better and, fortunately, we can, thanks to diversification.

William Sharpe famously proved that adding a risky asset to an investment portfolio reduces your total risk exposure provided the risks of that asset and the original portfolio are sufficiently different. It is well documented that such differentiated or uncorrelated assets (such as government bonds for example) are currently overpriced and, as such, often increase risk despite, on the surface, appearing to reduce it.

This is true for most traditional Strategic Asset Allocation models, and the much-admired balanced funds of stocks and government bonds may have had their day. However, since the financial crisis we have continued to find assets that significantly reduce the risk of our equity portfolio and incrementally add to the returns we generate. The key is to think about such assets in relation to your own portfolio, and use them tactically.

If, for example, you are worried about the effect that political uncertainty will have on your companies, owning 5-10% of gold has been shown to frequently mitigate losses during uncertainty induced sell offs.

If your portfolio of highly valued consumer staples stocks has performed well, but you are not yet willing to sell the positions, perhaps including some Index Linked Gilts would makes sense. That would offset any losses you may suffer should those stocks de-rate in a highly inflationary environment

If you are worried about a broader economic slowdown or recession, then the simplest diversifying asset will likely be conventional government bonds as rates may well be cut, driving yields lower once again and the price of these bonds higher.

We believe that diversification within your stock portfolio is the most critical place to start, but that value can also be added (both in terms of risk reduction and return enhancement) through the tactical use of non-equity investments, if tailored specifically to your portfolio.

If we return to our earlier inadequate allocation of 30% stocks and 70% cash, the above principles would instead make us comfortable investing around 50-60% of our assets in stocks, provided we have the remainder invested in diversifying non-equity assets similar to those above.

The result is a portfolio with higher expected returns, despite taking similar or even lower levels of risk. A true understanding of this alchemy is what sets successful long-term investors apart from the crowd.

Freddie Lait is founder and CIO of Latitude Investment Management and Investment Manager of The Latitude Horizon Fund.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.