By Tom Caddick, managing director at Nedgroup Investments
Many of us who work in the investment industry wonder how we would have fared during the most turbulent episodes in market history. Could I have made money in the dotcom crash? How would I have navigated the global financial crisis (GFC)?
All hypothetical, of course. But in recent months, the retirements of some of the most high profile portfolio managers, responsible for running multi-billion strategies, has got me thinking about crisis management in a more tangible sense.
With a generation of experience exiting stage left, how equipped will today’s portfolio managers prove at dealing with genuine crises, marked by wild price movements, panic and liquidity disappearing overnight?
Artificial markets
For portfolio managers who entered the industry after the GFC, most of their experience has been shaped by artificial market conditions. Quantitative easing, historically low – sometimes negative – interest rates and abundant liquidity fuelled a prolonged bull market where the fundamental lesson was simple. Taking risk pays.
Even the Covid drawdown, steep as it was, proved short-lived as both fiscal and monetary policymakers took drastic action to stabilise markets and economies. For post-GFC managers, this reinforced the idea that dips are buying opportunities, central banks have your back, risk-on wins.
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More recently, we have seen a return of more familiar, some would say ‘normal’, conditions. Inflation reared its head again in 2021 and still lingers, despite the best efforts of central banks through aggressive monetary tightening.
For more recent entrants to portfolio management, this presented challenges they simply hadn’t faced before. Markets moving in both directions, with central bank intervention working against managers rather than propping them up. Taking risk in such environments carries more jeopardy.
Experience vs skill
This isn’t an attack on new talent. Many post-GFC managers are brilliant analysts, rigorous thinkers and hard workers. The issue is experiential, not intellectual.
Managers might have read about previous cycles. They might understand the theory of how different market regimes behave. But reading about something and living through it are fundamentally different. Recognition of patterns in those cycles cannot be taught from textbooks.
Not all experience is created equal. Tenure, mentors and the culture you are exposed to matter greatly. But with 20-30-year track records, good managers have built the credibility to make contrarian calls that might look wrong for six or 12 months without losing the trust of their investors (or employers).
A manager with three years of working in relatively benign market conditions does not have the same cushion. Making a bold decision that goes against consensus is terrifying; the rational response is to follow the crowd and avoid decisions that might set them apart, even if those are precisely the decisions that would add value over time.
This is where index hugging and herd behaviour come from. It is not that managers lack conviction or analytical ability, just that incentives make consensus the safer option. When everyone is making similar decisions based on similar recent experiences, the industry becomes more fragile, not less.
Revolving door problem
Recent industry data suggests average fund manager turnover is running at approximately 30%. That translates to an average tenure of three to four years. Four years used to be our baseline for evaluating a manager’s track record. Now it is becoming the average time they stay in post, an obvious issue in an industry where the consultant and research gatekeepers put a premium on team stability.
None of this is happening in a vacuum, either. Traditional asset managers with bloated cost bases, largely concentrated in their front offices, face existential questions about their future. The easiest way to cut costs is to remove the highest-paid individuals, which often means the most experienced managers.
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Covid, meanwhile, prompted a reassessment of life priorities. Some managers who have already made substantial money decided they would rather teach classical guitar or practice yoga than continue in the high-pressure environment of asset management.
Third, active management has come under scrutiny over the past decade. Many managers were derided as overcharging and underdelivering versus cheap passive solutions, regardless of track record. When an entire sector comes under that kind of pressure, talent leaves.
Wake-up call
The asset management industry faces a knowledge transfer drain. As experienced managers retire or leave the sector, and as turnover remains elevated, we risk losing institutional memory of how to manage money in stormy waters, not just calm seas.
This is not sustainable. The industry needs to recognise that experience is an asset, not a cost. It needs to create career paths that reward disciplined, process-driven investment across full market cycles, not just recent performance. It needs to be honest about the limitations of track records built entirely in artificial bull markets.
This is because when the next genuine market bust comes, and it will come, the industry will be tested not just on its analytical capabilities but on its experiential depth. And right now, that depth is thinner than it should be.
