“The focus of our effort is profiling the personalities of investment professionals and those who are involved in the investment process, to understand that decision-making process.”
Nathan Gelber is the founder and Chief Investment Officer of Stamford Associates Limited. Stamford was launched in 1984 with the vision to materially improve the traditional investment consulting model for UK pension schemes with a focus on providing superior investment solutions, generating superior risk adjusted returns and establishing effective governance structures. It has subsequently grown to become a leading international investment consultancy firm.
Behavioral psychology has only more recently entered the mainstream. At Stamford, though, behavioral psychology professionals have been used to better understand investment professionals and their decision-making process. Analytics are combined with in-person observations during the employee-hiring process as well as the day-to-day work environment. “Psychologists have 14 criteria which they are interested in; those include curiosity, independent thinking, and the willingness to go against the crowd and not be a follower.”
Transparency is key in the investment evaluation process. Bernie Madoff attempted to attract investment from Stamford, but his unwillingness to be transparent served as a non-starter for a company that uses a rigorous and holistic evaluation approach.
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SPEAKER
Nathan Gelber
Founder & Chief Investment Officer
Stamford Associates
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
Rachel Pether: (00:08)
Hi everyone and welcome back to SALT Talks, my name is Rachel Pether and I'm a senior advisor to SkyBridge Capital as well as being the MC for salt, a thought leadership forum and networking platform that encompasses business technology and politics. Now, SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers, and just as we do at our global SALT conference areas, we aim to empower really big, important ideas and give our audience a window into the minds of subject matter experts.
Rachel Pether: (00:42)
Today I'm very excited to be speaking to Nathan Gelber. Nathan is the founder and chief investment officer of Stamford Associates, which he founded in 1995 with the vision to improve the traditional investment consulting model for UK pension schemes. Since then, it's grown to become a leading international investment consultancy firm, and the Telegraph in the UK actually noted that it was perhaps the world's most thorough system of fund research for the way that they incorporate behavioral psychology into the investment process. Prior to founding Stamford, Nathan worked for Orion Bank in London and Hill Samuel & Co. Nathan, welcome to SALT Talks.
Nathan Gelber: (01:24)
Rachel, thank you very much. A pleasure to be with you.
Rachel Pether: (01:27)
Now you have a wealth of experience that spans over 40 years, so maybe just start by telling me a bit about your personal background.
Nathan Gelber: (01:37)
I started working in the city in the long distant past, about 45 years ago, and cut my teeth at two investment banking firms, one called Orion Bank Ltd, the other one as you say, Hill Samuel & Co Ltd, where I worked predominantly in corporate finance, as well as in investment management. After 10 years, I started my own business with the idea to help institutional investors to improve their investment outcomes by assisting them devising efficient investment strategies and populate those with the best investment management talent we're able to find for them. And when we're looking at the firm now, you see we employ roughly 42 people, have a global reach when it comes to placing our clients assets with talented investment managers, and oversee assets in excess of £70 billion.
Rachel Pether: (02:51)
Within the 42 people that you have, how many behavioral psychologists do you employ?
Nathan Gelber: (02:57)
We have worked with behavioral psychologists for the better of 20 years. It started as an experiment and developed into a very significant part of our analytics. And as we sit here today, we employ full time three qualified psychologists under the leadership of Professor Adrian Furnham, who used to be a head of behavioral finance at UCL in London, a preeminent behavioral psychologist.
Rachel Pether: (03:30)
So behavioral psychology now is much more mainstream than it was 30, 20, even 10 years ago. What initially generated your interest in this area?
Nathan Gelber: (03:44)
As you well know, Rachel, the mainstream of behavioral psychology really looks predominantly at the behavior of groups and tries to identify the traits that group behaviors display. We have taken this one step further because we're more interested in the behavior of individuals and individual differences, so the focus of our effort is profiling the personalities of investment professionals and those who are involved in investment process, to understand that decision-making process.
Rachel Pether: (04:27)
And so what does this actually look like in practice when you go into investment teams and then assess individuals? How do you actually incorporate the behavioral psychology element?
Nathan Gelber: (04:41)
Our work is holistic in nature and comprises [inaudible 00:04:45] analytics, as you would imagine from a firm such as ours, and integrated with it are the psychologists, so they are integral parts of our investment team and participate in each of our engagements with external managers, whether it is doing the appraisal and assessment process, or whether it relates to ongoing managing and monitoring, we always have a psychologist sit next to us at the table to observe things which the untrained eye simply cannot see.
Rachel Pether: (05:20)
And so with that [crosstalk 00:05:25].
Nathan Gelber: (05:23)
And feed in... I'm sorry.
Rachel Pether: (05:29)
Continue.
Nathan Gelber: (05:30)
The qualities feed into our overall appraisals and to the extent that they raise concerns, we take those concerns very seriously, and there have been instances where the psychologists gave us strong advice to pursue a give mandate because they just, for example, didn't feel comfortable with the decision making made by a group of individuals.
Rachel Pether: (05:55)
I'd love to come back to specific case studies of the managers that you have, let's say rejected for want of a better word, but we've already had a question coming in from the audience on what are some of the key questions that you ask your potential fund managers? And how detailed is the questionnaire?
Nathan Gelber: (06:17)
Well, the questionnaire we send out is a standard form of questionnaire which basically tries to summarize the investment process and individuals involved in those processes. This is more of what we would describe as fundamental due diligence. The substance of our assessment and appraisal process takes place at face-to-face meetings with prospective managers, and as I mentioned earlier, those meetings are attended by the psychologist as well.
Nathan Gelber: (06:54)
Whilst we on the investment side are essentially looking for evidence of investment edge, exceptional talent, and consistency of application of a well designed investment process, the psychologists have 14 criteria which they are interested in; those include curiosity, independent thinking, the willingness to go against the crowd and not be a follower. So there's a whole slew of different aspects which they are considering and it all goes into the melting pot, psychology together with investment, and we think it's how it should be.
Nathan Gelber: (07:51)
The sad thing in our industry is that the great majority of participants rely on past as an indicator for the future. We all know that is a very unreliable indicator, however, human behavior is such that we have behavioral patterns which repeat and are therefore more reliable, and in the context of making the investment decisions, in the absence of complete information, those behavioral aspects become a key determinant of success and repeatability of that success.
Rachel Pether: (08:35)
I love that approach that past performance doesn't equal future performance, but past behaviors do. And just to dive a bit deeper into some of the managers that you haven't gone with because of this analysis, there have been a number of high profile downfalls of managers recently, did any of these come across your radar? And maybe tell me an example of a manager that you didn't go with because of incomplete information.
Nathan Gelber: (09:08)
Well, the easiest example is Bernie Madoff. As you know, Bernie Madoff attracted a lot of attention from investors and was able to accumulate good assets under management. He knocked at our door twice in an attempt to attract capital from our clients, and we stipulated certain disclosure and transparency requirements, none of which Madoff met, and so we didn't even get Madoff in front of our psychologist. We said, "No, no thank you".
Nathan Gelber: (09:53)
Transparency is key to our ability to analyze and assess managers, and we make this very clear at the outset of any contact when it comes to appraising managers, and we forewarn managers of the thoroughness and granular detail, both from an investment perspective as well as from the psychological angle, and forewarn them that an engagement with us may not only be very time consuming and labor intensive, but may also extend over a longer time period, and therefore a process before we engage in analysis.
Nathan Gelber: (10:32)
So [inaudible 00:10:35] fall by the wayside, because they're not able or willing to be transparent, and others because they just don't fill the criteria. We have very high standards and client's capital is important to all of us and we want to make sure that the stewardship of this capital goes into those hands that we deem to be the most capable investors we can find.
Rachel Pether: (11:03)
So given this then, and the emphasis on transparency, what are your views on quant managers, and I guess by extension of that, the increase that we're seeing in artificial intelligence and investment management?
Nathan Gelber: (11:19)
We've thought long and hard about both the use of artificial intelligence, as well as quant based managers on behalf of our clients, because in theory, strategies could be a very good diversifier relative to the other more fundamental strategies that we're embracing for our clients. The disappointing conclusion that we have reached relating to both of those is that we are unable to garner sufficient transparency and clarity about the underlying processes. We endorse those, so to this date we have not used any quant based or AI strategy, and unless managers are willing to share what we would deem to be the black box content with us, it's impossible for us to make a professional assessment, and we just can't endorse something which we don't really understand how it functions.
Rachel Pether: (12:27)
Yeah, that makes sense. And I do have a couple more questions on the behavioral side before moving on to some more audience questions. How have you seen the acceptance of behavioral psychology change over time, given that you've been working in this area for a number of decades now?
Nathan Gelber: (12:48)
Well, if you look at the wider marketplace, I'm actually not aware whether any consultancy firm such as ours has embraced behavioral psychology the same way we embraced it and apply it in practice. Is it a sign of things to come possibly? What we found is that our own track record has improved tremendously since embracing behavioral psychology as part and parcel of our [inaudible 00:13:21]. We've gone from a manager selection hit rate of roughly 51, 52%, to 82% over the last 20 years, which is a clear indication that psychology must be a helpful ingredient of our overall decision-making process and indeed is helpful picking the right managers.
Nathan Gelber: (13:44)
But it's not only picking the right managers, it's also sitting through them through periods of under performance without losing one's nerve, and indeed, using psychology to say goodbye to a manager when perhaps the underlying performance numbers don't suggest that it is time to do so. So, procyclical behavior is not something which we endorse or engage with, it could be coincidental to what we're doing, but we are much more driven by looking into the future based on our most recent behaviors than anything else.
Rachel Pether: (14:22)
So just a quick question, how do you actually define hit rate when you mentioned it's increased from just over 50% to 82, how do you define hit rate?
Nathan Gelber: (14:36)
What we are doing is we are looking at manager appointment and the benchmark relative to which a manager has been appointed, and we measure whether or not over a protracted time period, let's say five or ten years, the manager has built an investment return in excess of the benchmark net of fees. So if you take the 82%, roughly you will find that it means that four out of five managers that we recommended and appointed have exceeded those benchmarks based on the criteria I just explained. So one out of five, if you like, has been a dud, whilst four out of five have been successful. And of course the math works in such a way that when you take them together on an aggregate basis, they're delivering to our clients. We would like improve our hit rate, but it's tough, we think, and talent is not easy to find.
Rachel Pether: (15:44)
No, that's certainly true, and I guess that leads quite nicely into the next question. Obviously, during the current pandemic, a lot of... Well, everyone actually is seeing levels of stress that they're not used to, everyone is under high pressure situations; in this current environment, what are some of the most common biases that you're seeing within your managers?
Nathan Gelber: (16:10)
What we're hoping for are behaviors which are consistent with the investment process that our clients have bought into. So we are observing whether or not managers portfolio footprints are consistent with our expectations, we're not necessarily second guessing whether they buy Shell and sell BP and whether these were good or bad decisions, it's much more a question of following the process as we set out at the beginning of our arrangement with them.
Nathan Gelber: (16:48)
During crisis periods, it is particularly important that managers stick to the guns and are not being tossed around by noise in the market. And when I look at one common denominator, if you like, amongst all the 40 plus managers that we're currently using for our clients, it is that behavioral aspect of sticking to your guns through thick or thin. It doesn't mean that you don't take into account the investment environment and the news flow, but we don't expect a knee-jerk reactions.
Nathan Gelber: (17:26)
So the biases amongst those managers remain to be steadfast in the investment philosophy and application of the process. And that's what we've seen this time around and in many other crises as well, managers usually are long-term orientated, have high conviction, IE concentrated portfolios, and what we do see again in situations such as this, is that they average down on their most attractive holdings. And again, it's something that we would expect in a scenario like that.
Rachel Pether: (18:07)
Now, we've had a number of audience questions coming in and some are related to your specific approach and some to the market, so I'll ask some related to your specific approach first. Have you done performance attribution in terms of asset allocation versus manager selection? And if so, what have some of the results been?
Nathan Gelber: (18:30)
Yes, we have undertaken analysis of asset allocation versus manager selection and security selection in particular, and what we find is that the long term asset allocation is a key driver to overall return. It also speaks to the risk profile of any given investor, and from investor to investor this is a very individualistic assessment. Once the asset allocation has been determined, we encourage our clients not to apply short-term tactical asset allocation, but stick to the strategic goals and use market volatility for rebalancing purposes, because skepticism vis-a-vis people's ability to add value to tactical asset allocation. Rebalancing, we believe, is the second best solution to long-term asset allocation, and what it means in practice is that by rebalancing you sell high and you buy low, which to us is a very attractive value proposition.
Nathan Gelber: (19:48)
In terms of added value through manager selections, [inaudible 00:19:53] and again, over long time periods, it's not unreasonable to expect an added value of roughly 2% per annum net of fees in excess of a state market benchmark, which over long time periods adds considerable value, as you can can imagine. However, excess returns can be variable and these kind of active strategies are not necessarily for the faint hearted because of the deviation from both an upscale benchmark and a relative benchmark over shorter time periods.
Rachel Pether: (20:32)
Within Stamford then, Nathan, do you have your own style biases? And I guess this goes back to a question from the audience as to what's your recent view on the dominance of growth stocks versus value stocks.
Nathan Gelber: (20:49)
We, do have certain biases that must not necessarily be characterized as style biases, but if I may just summarize them for a moment or two, and we're trying to understand the implication of those biases, so we are really quite allergic to its capital impairment. So one of the areas we're paying a lot of attention to, is trying to understand how managers think about capital impairment or realize losses, and in our analysis of past behaviors we're particularly keen to understand how losses have been occurred and why. And repeatability of a fairly high loss rate in a given strategy is something that would concern us for time. So we have a bias towards capital preservation, which leads us more to value type managers, but not exclusively value type managers, because growth managers can also have a capital preservation mindset, which is perfectly acceptable, but the volatility around capital preservation and growth orientated strategy is so much greater and therefore so much riskier than it is in value type strategies.
Nathan Gelber: (22:17)
Other biases we have really to long time periods, where we and our clients are long-term investors, so managers who have high portfolio turnover are not necessarily the ones we would favor. Equally, we are not great friends of high leverage in companies, so we are looking towards managers that are not necessarily running highly leveraged types of portfolios through the underlying investments. They're looking for people who have integrity, both integrity of thought, as well as integrity of ethics and morals, and people have a mindset which is clients first. Duty of care and governance, good governance, is key to what we think we are delivering to our clients. So these are fairly material biases, which eliminate a fairly lump of market disciplines.
Rachel Pether: (23:26)
And so looking here we've also had a question coming in from the audience on emerging markets. What's your view on emerging markets and assessment there, and are you seeing demand from clients in the likes of India and Africa and other emerging markets?
Nathan Gelber: (23:44)
We've been engaged in emerging markets for the better part of the last 35 years. We've been always exposed to emerging markets and managers who operate in those markets, both sitting in developed markets and those who are resident in India or China or Hong Kong, or in any other markets that could be relevant. Our experience has been favorable over the years, although the governance aspect relating to the underlying investments is one which is not always compared to Western standards.
Nathan Gelber: (24:25)
So we have a particular level of caution when it comes to understanding how managers think about governance in particular and the oversight over the deployment of our client's capital. So it's an area which has been rewarding for us, it's an area that has displayed considerable volatility, and you are aware of the various crises in [inaudible 00:24:52], whether it was the Russia crisis or the ones relating to the Far East some time ago. With a preservation of capital mindset, we are particularly cautious, but exposed to those markets.
Rachel Pether: (25:09)
And you talk a lot about governance, which I guess is inherently embedded in your process. If you're looking at ESG, obviously another big theme at the moment, do you also focus on the other letters within that? Do you also look at environmental and social issues, or is it really more the governance piece that you're focused on?
Nathan Gelber: (25:31)
Our predominant interest from our client's perspective is in the investment oversight and investment governance. However, as we look at managers, we are keen that they look at the other aspects of ESG as well. So between the underlying managers and ourselves, we cover the entire spectrum of ESG to make sure that our client's capital is deployed in a responsible and transparent fashion. It's important, it's important.
Rachel Pether: (26:05)
I couldn't agree more. Just one final question, we've had someone ask for recommendation from you actually, which is, do you have some recommendations for small institutional investors as well as family offices in terms of effective manager selection, when perhaps they have less resources and depth to do a full assessment?
Nathan Gelber: (26:30)
That's a tricky and challenging question. Our view is that it's very difficult to identify talent ex-ante, if we all accept the past record is not a reliable indicator for the future, it is equally difficult to analyze both from a behavioral as well as from an investment perspective what the prospects of a game investment proposition are. Invest managers are excellent in making presentations and preparing pitches. Reality often looks very different, and the ability to differentiate between a marketing pitch and reality is not always that easy. So it needs resources and experience to avoid making mistakes and pick those that will do well over time, but also unpick those when the time has come perhaps that they're running out of steam for one reason or the other.
Nathan Gelber: (27:30)
And what we are saying to family offices and smaller institutions who do not have internal resources, to either work with a firm like ours, where we can be helpful in one way or the other, or go passive. Passive is a very attractive way of gaining exposure to various markets and capturing beta, and not try and capture alpha when the downside can be quite unattractive [crosstalk 00:28:04] somebody you're confident in or do it yourself on a passive basis.
Rachel Pether: (28:11)
Yeah, because I guess even going passive as an active decision, isn't it, and one that you have to decide for yourself.
Nathan Gelber: (28:17)
Yes, exactly.
Rachel Pether: (28:19)
Excellent. Well, thank you so much for your time today, Nathan, it's been a pleasure talking to you as always and I look forward to continuing this discussion on behavioral finance at a future date. Thank you so much.
Nathan Gelber: (28:33)
Thank you very much Rachel, pleasure to be with you.