The secret sauce of a winning investment team

By Larissa Fernand |  12-11-19 | 
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Larissa Fernand is Website Editor for She would like to hear from you and welcomes your feedback.

What do top investment teams have in common? What makes some succeed while others fall short? What goes into the secret sauce of high performers?

James Ware and Michael Falk of Focus Consulting Group undertook a research project into the common factors shared by high-performing investment teams. They developed a list of factors that contribute to fund performance and asked responders to rate the importance of each factor in contributing to outperformance.

  • The number of individual respondents were 96, selected from 10 investment teams.
  • The teams were selected based on having achieved “benchmark plus” nominal and risk-adjusted performance, for 10 years or longer, with consistent results — not just one or two extraordinary years.
  • Hard Skills represent process and structure.
  • Soft Skills represent relationships and interpersonal attributes.
  • The figures in brackets are the percentage who agree.

95%: Hard Skill - Disciplined process

While all teams are expected to have a disciplined process, the unconventional wisdom holds that these processes need to be examined over time and continually improved and evolved. The top teams indicated that they have buy/size/sell process disciplines. Other attributes were clarity and acceptance of decision rights: Everyone knows who makes the final call and what the ground rules for decision making are. Participant comments showed a clear commitment to an organized and clear process.

94%: Hard Skill - Continuous improvement

The concept of ongoing improvement is a conventional one, but often there is a bit of self-deception around it. Many investment teams fail to examine their filters or engage in post-mortems on a regular basis to evaluate past decisions. By our count, only about 10% of investment teams conduct such after-action analysis. And even those that claim to tend to fall short: They don’t keep careful journal entries when stocks are discussed, purchased, and sold. Behavioral research demonstrates that our minds rewrite history, so careful records are necessary to learn from experience.

93%: Soft Skill - Committed to one another’s success

The commitment factor was the single most important soft element of success. One participant commented, “Our process and our success is built upon the team and its commitment to each other. Without this commitment, I don’t think we’d have the culture of trust which allows us to be creative, make mistakes, and still show up deeply excited to be there the next day.” We all know a common problem in the investment world: big egos. The best teams operate from a true sense of team: “We are all in this together. We succeed as a team.”

91%: Hard Skill - Independence from outside influencers

Top-performing teams serve one master: the client. They are laser focused on process and execution and not influenced by shareholders or parent companies. While we have seen teams outperform despite such influence, our survey participants indicated that independence is important to their success. Indeed, at FCG, we have also seen how outside influencers can creep in during periods of underperformance, to detrimental effect.

90%: Soft Skill - Passion for our work

We’ve never met a professional investor who didn’t say, “Yes, I have passion for the work.” And when we measure firm cultures, the passion factor invariably comes out as the top motivator, ahead of clients, colleagues, and higher purpose. The nuance is this: Many finance professionals — either at first or after their industry “training” — place money and winning above passion for the work. This can lead to demotivation when performance or bonuses are down. Their passion isn’t really for the work but for the extrinsic motivators — things that are out of their control, like money and performance. The top teams truly love the markets and the work: Their passion carries them through the inevitable down periods.

89%: Soft Skill - We enjoy working together

Teams that like and trust each other tend to have better debates. Debate is important, and many mediocre investment teams don’t achieve it. They either have a general silence as team members withhold their ideas and counterpoints, or they have arguments in which team members become defensive and take things personally. Neither environment supports good decision making.

86%: Hard Skill - Diversity of thinking styles

The value of cognitive diversity is supported by ample research. The problem is measurement. How do you know your team is cognitively diverse? The top teams that we researched have used the Enneagram model to measure each team members’ approach to problem solving. Top teams have a mix of different styles. Of the nine distinct varieties, good teams typically have five or more.

86%: Soft Skill - Capacity for good debate

Teams that make outstanding decisions thoroughly vet ideas and have in-depth discussions about them without damaging trust or morale. Many teams with weak EQ have “pseudo” debates in which much is left unsaid. They lack candor because the unspoken agreement is: “If you don’t rock my boat, I won’t rock yours.”

Only teams with high trust and candor can hope to achieve true debate and dialogue. Top teams build healthy environments for fruitful debate and healthy dialogue by creating trust and safety. Good post-mortems pose two important questions to each team member: What could we have known but didn’t, and what could I have contributed to add value?

85%: Hard Skill - Developing team members

James Valentine, author of Best Practices for Equity Research Analystshas created training modules to improve the basic skills of analysts. He has found many research teams resist developing their analysts. Their rationale? “We have investment professionals with CFA designations. We don’t need development. We are fully-finished products.” But recent active manager track records raise the question, How much denial are these research teams in?! The same firms that are underperforming — and there are a lot of them — resist developing their analysts! Our survey results suggest that the best teams do not make this mistake. They develop and train their smart, hardworking analysts.

85%: Soft Skill - Emotional Intelligence (EQ)

Investment professionals are waking up to EQ’s importance in good decision making. Comments from our survey participants support this:

  • “We recognize this is a very fickle business and that mistakes are made. Therefore, there is a level of ego and confidence that is mandatory, but it is also extremely important to be able to admit what you don’t know, encourage others, and learn from the inevitable mistakes.”
  • “In a collaborative environment, we need people to feel safe evaluating each other’s ideas. We could do a better job of speaking fairly and considerately, to spur honest feedback.”
  • “We need to be able to rigorously challenge an idea and the work that went into it and still walk away from the table as colleagues and friends. That is not easy, and it takes a lot of emotional intelligence in terms of how you conduct yourself in a debate and how you manage your emotions before and after.”
  • “I suspect compared with peers, we have more ‘emotional intelligence’ than ‘discipline.’ Emotional intelligence is more difficult to develop as it needs a well-aligned, well-performing, and stable team environment, and it takes time.”

A more detailed and graphic version is available on Enterprising Investor, where the article initially appeared.

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