We aim to provide you with benchmark-beating investment returns for at least the next 100 years. But we can succeed in this ambition only for as long as we and our successors retain the trust and confidence of you and your successors. We have worthy competitors, and no 'guaranteed' market share or contractual lock-ins to fall back on. If we fail to retain your trust and confidence over the long term, we will fail to survive. That is how it should be.
To achieve our long-term aspiration it is crucial for us to find, develop and motivate the right successors. Ideally, these successors should do a better job than us, before passing the baton to a new generation who do even better, and so on. It is hard for clients to evaluate the quality of our efforts in this regard. One way would be to wait a long time to see how future generations perform. This is, of course, the ultimate test. But for clients desiring a shorter feedback loop, Ian Liddle discusses here our efforts to find, develop and motivate the next generation of portfolio managers.
Find
Fortunately, there are many bright, hard-working and ambitious graduates from both South African and foreign universities who are eager to join the Allan Gray investment team. The hard part for us is to choose just a few from the many worthy applicants. Applicants need to pass successive filters including a record of academic excellence, a differentiating CV, a thoughtfully completed questionnaire, psychometric and aptitude tests, and an insightful written report on a company before being selected to be interviewed by our portfolio managers. We usually interview about 30 candidates per year and make just a few offers.
Successful applicants typically have a few years of work experience, although some have joined us straight out of university. We do not hire only accountants and actuaries - we are prepared to hire graduates from all faculties. Indeed, we prefer to do so to maintain a diversity of skills, experiences and outlooks in the investment team.
New analysts join us on a fixed-term contract as 'trainee analysts'. This fixed term affords us the opportunity to develop a better informed view of the analyst's long-term potential to make money for clients. It also affords the analyst a wonderful opportunity to learn about the stock market by participating in a dynamic investment team. Over time, we tend to offer permanent employment to only a minority of trainee analysts - those who we believe have the best potential. While we strive to be as well-informed as possible when we make this decision, it is ultimately subjective given the relatively short time frame we have to measure the analyst's performance. We have made mistakes on this decision in the past, and I am sure we will do so again in the future, but as with stock picking, a 100% success rate in picking winners is probably neither attainable nor necessary for a successful final outcome.
We aim to keep the turnover rate in the investment team at an optimal level, which balances the need to have a core contingent of experienced analysts who know their companies/industries well with the need to make enough space to be able to keep hiring promising new candidates to give us the best chance of finding the next Simon Marais, or indeed the next Allan Gray.
We hired two trainee analysts in 2012 and three trainees are scheduled to join us in the first half of 2013.
Develop
The pace of an analyst's development is determined mainly by that analyst's own internal motivation. There are no official Allan Gray training courses for investment analysts. Analysts learn by listening in policy group meetings, by discussing and debating ideas, by taking responsibility for their own reports, by asking questions, by part-time study, by reading widely and by any other means that work for them. We prefer it if our analysts do not all read the same material, but rather follow their own interests/angles so that a diversity of opinions is brought to bear on our discussions.
Having said that, we do provide a clear framework within which analysts should focus their efforts, and which forms the basis for a regular evaluation of their performance. The most important deliverable for less experienced analysts is well-researched and insightful research reports accompanied by well-motivated buy or sell recommendations. As analysts gain experience they are expected to make increasing contributions to policy group discussions.
Experienced analysts are offered the opportunity to manage a paper portfolio (known internally as an ARL - analyst recommendation list). The ARL operates in a realistic fashion: analysts enter buy and sell orders, they are charged market impact costs which depend on the aggression of their order, and they are allocated trades based on actual volumes trading in the market. We measure the performance of each analyst's ARL. In addition, analysts are required to write brief motivations for their major trades and quarterly updates on their thinking about their portfolios. This provides us with rich information on which to assess the potential for analysts to develop into money-makers for our clients. Eight of our analysts are currently managing their own individual paper portfolios. Importantly, the analysts' trade motivations are sent automatically to all our portfolio managers so that they can consider putting our analysts' ideas into action in our clients' real money portfolios.
We have recently promoted two of our experienced analysts (Ruan Stander and Jacques Plaut) to the role of Associate Portfolio Manager. The practical impact of this is that the trade instructions on their ARLs will now drive real-money trades on a small slice of our clients' equity and balanced portfolios. Mark Dunley-Owen, who has been managing a slice of our clients' fixed interest assets since July 2011, will soon manage a slice of our stable portfolios alongside me. These are exciting developments for Ruan, Jacques, Mark and for us. We are looking forward to appointing a few more Associate Portfolio Managers over time.
Motivate
The people who work their way to a position as an Allan Gray portfolio manager are by nature competitive and internally motivated. They do not need much encouragement to work hard and strive to be the best. Nevertheless, Allan Gray executives are strongly incentivised to do the best they can for our clients over a long period of time.
IT IS CRUCIAL FOR US TO FIND, DEVELOP AND MOTIVATE THE RIGHT SUCCESSORS
Our senior analysts and portfolio managers (along with senior executives responsible for our company's operations) share in the profits of our firm much like partners at different levels in a partnership. Our firm's profitability over both the short term (because of performance fees) and the long term (because clients can move their money elsewhere) is completely dependent on the quality of the service we provide to our clients. Thus, our senior executives will succeed only to the extent that we do a good job for clients.
Senior executives share in the profits of our business both while they are active in the business and, importantly, after they have left the firm. The 'tail' on this participation typically extends for up to 10 years. This creates a clear incentive for all of us incumbents to find and develop outstanding people to whom we can pass the baton, and to motivate them to do the same.
Many of our senior executives have also accepted the opportunity to buy ordinary shares in our business, and this further entrenches the incentive we have to think long term for clients, for our business and for future generations of Allan Gray executives.