Hedge Magazine, April 2015. Original article p46-48.
Lee Freeman-Shor, portfolio manager of the Old Mutual European Best Ideas fund, and author of The Art of Execution.
It’s just a few days before the holiday season – for Lee Freeman-Shor that means Hanukkah – and the midday sun doesn’t quite fill the sky outside the riverside offices of Old Mutual Global Investors. Lee Freeman-Shor is showing no sign of having started winding down though, as he assures me his smart-casual jeans and blazer look is an Old Mutual staple: “Come in, and I’ll introduce you to some more people wearing jeans!”
Because of course, top-rated fund manager Freeman-Shor knows it’s all about the work, and success sometimes comes in unexpected forms. In fact, when Freeman-Shor crunched the numbers on his top-performing Best Ideas fund, the linchpin for making solid returns on investment was contrary to the story we usually hear that he wrote a book about it. ‘The Art of Execution’ explains how the world’s best fund managers make millions despite often being wrong.
The book is the sum lesson of Freeman-Shor’s tenure as portfolio manager of the €266m Old Mutual Global Best Ideas fund. The fund has gained nearly 79% on a cumulative basis since inception, when Freeman-Shor asked 45 of the world’s top investors to each choose ten high-conviction ideas. But even with the cream of the crop, Freeman-Shor was amazed to find the chance of their stock picks making money was no better than a coin toss. But the star managers certainly do make more money – and the reason is down to something else entirely: “It’s how they execute the idea that really matters. These guys have the exact same habit each time they’re losing or winning, and that’s what I’m obsessed with.”
Why it’s not about the idea
The trigger for this insight came when Freeman-Shor realised one legendary investor made significant returns even though the majority of his ideas actually lost money. “I asked myself: ‘Is this luck? Or is it skill.’ Because when you meet him, he’s a very impressive guy.” Digging into the trading data, Freeman-Shor realised this manager was really good at knowing when to quit. “I noticed he does the same thing every time he’s losing, and he does the same thing when he’s winning. Basically, it ensures he hits it out of the park. That’s what led me to the book: I wondered if it’s the same with all the investors who’ve really been successful for me.”
The fact that big returns is not about the idea was a surprise even to Freeman-Shor, because the conversation is usually about picking the stocks. Many of his managers were also surprised to learn what it was that made them so good. “Many have said to me: ‘I wish I had this [insight] from our analytics or risk departments’,” says Freeman-Shor. “The industry is so focused on ideas and portfolio construction, … no one really looks at the execution side, but this is what really matters.”
The book identifies five types of investor, based on how they behave when their stocks are rising or falling. The Rabbit freezes up and does nothing when they lose; the Assassin cuts their losses; the Hunter buys materially more when stocks are low; the Raider books profits too early and loses out; and the Connoisseur skims profits but leaves the bulk of the investment to grow. “I’m naturally a Hunter, so I’m quite comfortable sticking with a losing position. … Assassins are probably the most common type. Most tend to reduce the left tail risk by getting out of an idea before it does too much damage, and rotate into another idea.” He laughs: “I’ll say though, I don’t have any Rabbits! All the Rabbits I’ve ever had, have been shot.”
But knowing your type isn’t enough to guarantee perfect execution. Freeman-Shor is the first to admit emotions can run high in investments, especially with high-conviction ideas. On occasion, Freeman-Shor has had to call up a fund manager veering into Rabbit territory and ask what’s going on. “There was one stock that got down by 35%, and I noted the guy hadn’t done anything. … I rang him up – it happens to the best of us every now and again – and he sighed: ‘Well it’s down and … I’ve got a meeting with the CEO in two weeks to dig into this. I want to get my head around it before I act.’ I told him that’s great, but you don’t have to have that money invested while you do the work!” The fund manager in question sold the stock, and spent some months investigating while the stock kept falling. He bought in again at a low, and the stock did indeed come good. “But your emotions can impact you. It’s very hard to say, ‘I’m wrong.’ … The key is making sure you have a disciplined habit.”
Freeman-Shor says the book was written not just for the professionals, but for everyone: “This is something the general public should know. The principles are so simple, and lend themselves to any walk of life where you have to make big decisions.” The book is also a necessary contrast to the story we hear again and again, says Freeman-Shor, about the genius fund manager supported by dozens of analysts, churning out top insights that the everyman investor can only dream of getting their hands on. But, I say, it might be hard to convince the everyman investor to kill their darlings – has he spent any time in investment forums? There’s plenty of high conviction there too! Freeman-Shor nods: “I want [private investors] to know the idea is going to be wrong. Because all my research says the best are wrong most of the time, and you’re probably not better than the best.”
The specialist approach
Freeman-Shor (41) grew up in Nottingham, where he studied law. His first job after university was as a discretionary wealth manager. “I knew I didn’t want to be a lawyer,” he laughs. “I also didn’t want to be employed, which is funny because I am today. I wanted to run my own business.” Being a private client investor seemed like a good start, but it was tricky: Freeman-Shor was very young, catering to older clients. The employment route went from Winterthur to Schroders, before he joined Old Mutual Global Investors in 2005. Today he oversees more than $3 billion in high alpha and multi-asset strategies. “It’s been an evolution from being a plain vanilla multi-manager, through to the niche ten stock strategies we’re doing with Best Ideas, on to the direct multi-asset investing we do today.”
His interest in analytics goes back a long way: “I’ve always had a natural interest in what’s now called behavioural finance psychology. … I suppose my natural interest in psychology led me to look in the right areas to solve that problem: how the best investors can be wrong most of the time, and still make a ton of money.” But, I press, is there any hunch involved in investing at all? Or is it just systematic all the way? Freeman-Shor doesn’t hesitate: “I would say any magic comes from pure discipline. Having a plan for what to do when you’re winning or losing, and sticking to that plan.”
Freeman-Shor lives in Maidenhead with his wife Michal and their ten-year-old son Adam, who he spends much of his free time with, playing Halo on the XBox. Asked if he’s steering his son towards fund management, Freeman-Shor laughs, answering diplomatically: “I would like him to do something that gives him pleasure in life, and have fun. Right now he’s more into coding.” Freeman-Shor doesn’t dabble much outside his speciality, though: “If you came to my house, you’d see I just have a library full of behavioural books. You wouldn’t find lot of investment books, but there are shelves of books on decision-making and behavioural psychology – that’s what I love.”
He has a few favourite thinkers on the subject: Dan Ariely, Daniel Kahneman, Malcolm Gladwell; “Michael Lewis’ book, Moneyball, was interesting.” In baseball, all the coaches look for the same traits when scouting for new talent, even though those traits are irrelevant to ultimate success, explains Freeman-Shor. “[The manager in Moneyball] looked at it from a statistical perspective and realised that what you want, is finding the players who get walked the most – it’s a sign they’re very good at hitting home runs. The coach built a team around this, and had success beyond anyone’s expectations.” Freeman-Shor pauses. The Moneyball lesson lends itself to fund management also: “Most obsess over ideas, and a manager’s thoughts about the hot topics of the day. But they should be focused on how they execute their ideas. That’s what I do, and that’s why we’ve been successful.”