Why Communication is Key to Active Management

A few months ago I started recording conversations with some well-known allocators I had come to know in my two decades in this industry. I posted the first few on Apple’s podcast platform, emailed a group of friends to tell them about it, and waited.

One conversation flowed into the next; each offered fun stories and juicy nuggets of information about how the best in the business practice their craft.

We’ve discussed investment beliefs, asset allocation frameworks, manager selection challenges, governance hurdles, and team dynamics with allocators, managers, and entrepreneurs. Before I knew it, the podcast became a thing — enough so that editor Kip McDaniel asked me to expand on what I was learning using a decidedly older form of journalism: the column.

I’ll endeavor to bring you observations that I hope will be of assistance in your investing. In this inaugural column, I’d like to share a challenge we all face but rarely speak about: managing ourselves.

In a recent podcast episode with Harvard Business School professor Thomas DeLong, a renowned expert on organizational behavior, the subject of managing high performers arose. Almost everyone we interact with in this profession — allocators and managers alike — exemplifies the “high need for achievement” genotype, which DeLong has studied extensively.

In the podcast he describes four stories that commonly describe us all.

First, there are stories that we tell other people about ourselves, as if composing a résumé.

Second, there are stories that other people tell about us, as when our parents brag to their friends or our peers conduct performance evaluations.

The last two categories are the most interesting and are both types of self-talk — the stories we tell ourselves about ourselves.

Self-talk stories typically are either/or tales. Either they are self-affirming and boost our confidence, or they are self-doubting and serve the opposite extreme.

Perhaps counterintuitively, DeLong’s research has shown that high-need-for-achievement personalities — ubiquitous in asset management — spend far more time focused on self-doubting narratives. Although we don’t often speak about it aloud, there’s a good chance this is true for you, just as it is for me.

I’ll use the present moment as an example. I could tell myself a self-affirming story about this column: I’ve written extensively about the industry in the past, come up with clever ideas for my clients, made astute observations and market calls, and consistently received praise for my work, and later wrote a book that sold far more copies than I had expected.

But I’m more likely to do exactly what I have been doing in preparing to write: telling myself a story of doubt and failure. It goes something like this: I’m worried that my next piece won’t be as good as my last one, I wonder if I have enough to say, I don’t like being held to deadlines, and I remind myself that I wrote a book (when no one reads books anymore) about start-up hedge funds (a mature and maligned industry hardly in need of a new product).

I tell you this because we are all in the same boat.

So are our colleagues and peers.

Investing is a people business, yet relating deeply to the people around us and communicating in an authentic and vulnerable way are foreign concepts in asset management. DeLong asks questions that don’t normally come up in our day-to-day work experience.

When was the last time you asked a colleague what he is most proud of, and what he fears?

When was the last time you told someone you were wrong about something? When was the last time you apologized?

In these challenging times for active management, understanding DeLong’s points about high performers and creating real dialogue among team members are the key drivers of so-called organizational alpha. Internally, those seeking to beat a benchmark must learn to bring out what is deeply human and special from their teams. Externally, bonds forged with clients build a shared understanding of mission and a long-term perspective that all asset managers aspire to deliver.

Active management is not dead; it just needs more players to learn from successful lessons of the past.

One of those lessons is the importance of communication. A look inside firms like Capital Group and AQR reveals organizations equally renowned for performance, low employee turnover, and client communication — the three legs of a symbiotic stool.

The podcast and this column, then, are a new way of communicating with leaders in the money game. Top active managers will once again have their day in the sun, and soon. It’s time to get prepared.