By Charles Younes, head of investment management at Wise Investment
Sit across a boardroom table from a portfolio manager facing a multi-year performance drawdown, and you quickly realise that stockpicking is only half their job.
A portfolio manager is also a business manager. They run a team, manage a departmental P&L and answer to a corporate board. Between 2008 and 2021, active management in quality, growth, and compounding strategies felt deceptively simple. Zero-interest-rate policies rewarded long-duration earnings, allowing investment performance and commercial success to align seamlessly.
Post-2021, however, a market regime marked by sticky inflation, rising discount rates, heavy net outflows, and extreme index concentration has severed that alignment — forcing managers to make difficult business choices just to keep their strategies viable.
As fund selectors, our job is straightforward when factor tides are rising. The true test begins when we sit in consecutive due diligence meetings and witness three vastly different reactions to the exact same market storm.
Three paths through the same storm
When an established strategy experiences a multi-year performance winter accompanied by persistent client redemptions, the manager inevitably chooses a path:
- The mechanics of survival: In one room, you meet a manager whose process is being slowly hamstrung by structural market illiquidity and redemptions. As net outflows mount, the manager stops acting purely as a stock-picker and becomes a liquidity manager. Every trade is dictated by raising cash, trimming liquid winners, and managing concentration risks. The underlying stock selection thesis hasn’t broken, but the operational reality of managing a shrinking business threatens to overwhelm it.
- The unyielding purist: In the next room, the response to factor hostility is absolute process dogma. The manager refuses to alter a single line of the playbook, viewing any tweak as a compromise of integrity. They refresh analyst teams and refine risk tools, but their core message to clients and their board is unwavering: “We do nothing different. We wait for the market to realize its mistake.”
- The pragmatic pivot: In the third room, you find a manager who decides the old regime is not returning. Facing commercial pressure and shifting market structures, they abandon long-held tenets—such as a low-turnover “do nothing” stance—and actively pivot toward prevailing market themes, incorporating momentum and chasing new structural trends.
The dilemma: Adaptation versus style drift
This is where the fund selector’s burden lies. None of these meetings offer an easy answer, as each path challenges a core principle of portfolio construction:
- When does process evolution cross into destructive style drift? If a manager adapts their framework to survive, are they demonstrating necessary intellectual agility, or are they simply chasing performance in asset classes where they hold no competitive edge to protect their business P&L?
- When does conviction become wilful blindness? If a manager refuses to alter their process, is that institutional discipline, or are they failing to recognize a permanent structural shift in market mechanics?
- Is performance chasing disguised as risk management? When an allocator decides to redeem from an underperforming strategy, are they acting on genuine structural red flags, or simply succumbing to the human urge to time the market?
Resisting the urge to time the market
It is remarkably easy to look at a three-year relative drawdown and mistake factor fatigue for manager incompetence. The hardest part of active fund selection is recognising that our mandate is not to time factor cycles or sell at the point of maximum discomfort.
If we allocated to a high-conviction manager for a specific factor signature, firing them during a factor drawdown guarantees one outcome: locking in losses right before the factor tide inevitably turns.
Beyond the numbers
Ultimately, this is where data and numbers reach their limits. Quantitative tables, performance charts, and risk metrics detail what has happened, but they reveal nothing about what will happen next to the team, the business model, or the manager’s state of mind under commercial strain.
Spreadsheets cannot tell you if an investment team is on the verge of fracturing under budget pressure, or if a sudden strategic pivot stems from genuine insight or commercial panic.
Answering those questions requires stepping away from the data and bringing the tough, uncomfortable business questions face-to-face. That is the true work of active fund selection.
