GB cycling’s Shane Sutton hunts marginal gains in fund management

The career of Shane Sutton, technical director of Great Britain’s cycling team, took an unusual turn in April. As well as helping elite cyclists shave vital seconds off race times, he started advising two of the UK’s biggest asset management companies.

GLG Partners, a subsidiary of the world’s biggest listed hedge fund manager Man Group, and Schroders, Europe’s second largest independent asset management group, hired Mr Sutton in the belief that he could boost their investment performance.

“It may seem odd that a cycling coach is advising fund managers. But in both cycling and business, decisions are about emotions and behaviour – and everything is driven by numbers,” says Mr Sutton, who cycled in the Tour de France and won a gold medal for Australia in the Commonwealth Games before switching to coaching in 1997.

Sir Bradley Wiggins, the first British winner of the Tour de France in 2012, was “obsessed by numbers”, he adds.

The career twist of Mr Sutton highlights how asset management is changing, particularly at some traditional investment groups, which are ditching simple stockpicking techniques and adopting strategies used by their racier hedge fund cousins.

These include the use of relatively new and sophisticated derivatives, the development of more advanced data gathering and the use of psychology and behavioural finance.

The changes are partly in response to the financial crisis, which prompted more scepticism over performance promises, and rapid advances in technology. The growing popularity of low-cost market-tracking funds has also put pressure on active fund managers to justify their fees by producing better and more consistent returns through a more creative approach.

Schroders, one of London’s oldest financial companies with a history dating back to 1804, uses Mr Sutton and his business partner Rick Di Mascio to help their top fund managers.

The pair single out the managers’ strengths and weaknesses by analysing their personalities, characteristics and lifestyles and, perhaps most importantly, past trades. The aim is to pinpoint the conditions in which they made successful, moneymaking bets and when they took positions that flopped.

Mr Di Mascio, founder and chief executive of research group Inalytics, formerly worked at Goldman Sachs Asset Management. He has compiled a database of 8.8m trades by fund managers from more than 40 international investment groups over eight years.

He teamed up with Mr Sutton 18 months ago to combine his knowledge with the cycling coach’s understanding of how to combine data and motivation to make often marginal, but winning gains on the racetrack.

In both cycling and business, decisions are about emotions and behaviour – and everything is driven by numbers

Mr Di Mascio says he has been trying to import techniques used in sport for years. “The world of sport is 20 years ahead of the business world in terms of how to get the best out of your performance by analysing data, eating and drinking the right food and understanding how you perform under pressure.

“This might involve trying to curb the tendency to become overconfident and complacent when you are on a winning streak or trying to prevent a loss of confidence and panicky decision-making when you are on a losing run.”

Henderson Global Investors, the UK listed fund manager, is another group that is putting more emphasis on combining behavioural finance – which Daniel Kahneman helped to popularise in his best-selling book Thinking, Fast and Slow – with the analysis of data to improve investment performance. In his book, Prof Kahneman describes two different ways the brain forms thoughts: fast (automatic and emotional); and slow (logical and calculating).

Adam McConkey, director of UK smaller companies at Henderson, says it uses behavioural finance every day. “We look at the emotional content of our decisions, trying to both control and utilise what Kahneman described as the fast side of the brain while also using the slow, logical side. This helps us make better decisions.”

Henderson staff use similar techniques in their meetings with companies. “You have to be very attuned to make sure you understand the real picture as well as the presented picture. We are looking at how a person responds to a question. Do they take a long time to respond, do they hesitate or do they offer a quick, concise answer?”

Mr McConkey says the use of internet search engines and technology is increasingly helping investors understand human behaviour and mood, which in turn helps them pick stocks.

For example, when R&B star Pharrell Williams’s hit “Happy” reached number one for the third time in the UK this year – the first song to do so in 57 years – it suggested to Henderson that sentiment among consumers was improving, re­inforcing the view that stocks benefiting from recovery should be bought.

Traditional asset managers often bridle at the term “hedge fund”, feeling it has a negative connotation of high fees and scandals such as the Bernard Madoff affair. But some are unafraid to mimic their behaviour.

Stephen Crocombe, who heads the European multi-assets business of BlackRock, the world’s biggest investment manager, says it is now using risk-reducing trades that were considered the sole preserve of “macro” hedge funds 10 to 15 years ago.

Although not all traditional groups are adopting hedge fund techniques, more are creating multi-asset and absolute return funds, which do not measure performance against a market benchmark or restrict managers to equities or bonds. They are also using equity futures that enable a manager to bet on the direction of a market and credit derivatives to protect their bond investments.

Others, such as Legal & General Investment Management and Standard Life Investments, are expanding into the property and infrastructure debt markets in the so-called shadow banking area.

However, the wave of regulations designed to protect the financial system since it came close to imploding six years ago after the collapse of Lehman Brothers have also helped to put an emphasis on risk reduction as clients, particularly big pension funds, have become more wary.

This means more fund managers are hedging in the old-fashioned sense against losses as well as looking for higher and more consistent returns with portfolios made up of a wider range of assets that they consider safer.

Mr Sutton says more fund managers are trying to think and act like professional sportsmen, but that does not mean taking bigger risks. It is more about squeezing the absolute maximum out of performance by improving lifestyle, the way they use data and cope with success and failure.

“The days when a fund manager went out for a liquid lunch and then tried to make investment decisions are gone. The business world has become more professional, like sport.”

Further reading: No stopwatch needed
Three basic rules for fund managers

Martin Gilbert, chief executive of Aberdeen Asset Management, still likes to do things the old-fashioned way. The head of Europe’s biggest independent investment company says asset managers should stick to three very basic rules.

Investment rule number one: have a disciplined approach that you do not deviate from. If you are looking for undervalued rather than growth stocks, stick with that philosophy.

Investment rule number two: thoroughly analyse a company’s profit and loss statement.

Investment rule number three: meeting a company’s management is a must to understand what they are trying to achieve and whether their business will succeed.