Carefully crafted investment strategies, paired with a behavioural approach to manager appraisals, generate successful formula for Stamford Associates' allocator clients
Stamford Associates, a relatively small and selective London-based investment advisor, has occupied an influential niche in the UK’s investment space for over 30 years. This influence is not necessarily a result of its ability to predict investment trends, nor a taste for the esoteric.
Instead, with over GBP80 billion under advisement at the end of March 2021, the firm’s client roster of pensions, wealth managers and charities, relish Stamford’s ability to eschew background noise and its more strategy fashion-conscious peers, by approaching due diligence with a granular analytical focus, and practising a psychological assessment approach when considering new managers and monitoring incumbents.
Nathan Gelber, Founder and Chief Investment Officer, told Hedgeweek that he believes, “Stamford Associates’ combination of investment diagnostics, financial analysis, investment and behavioral analysis distinguishes the firm from its peer group.”
This holistic, careful demeanour is perhaps particularly characterised in its relationship with the hedge fund sector, where the business currently works with only four managers, all specialising in long/short equity. Stamford Associates has been considering investing in credit long/short strategies, but after following this particular market segment for 10 years or so, is still at the “keeping an eye on it” stage.
The firm, which allocates anywhere between 5-20 per cent of their clients’ assets to hedge funds, explains it selects managers in a forensic and unique way.
Gelber noted: “One primary consideration relates to our qualitative bias with regards to manager assessments and selection. To that end, we employ three fully qualified psychologists, who are full-time members of staff at Stamford Associates, to help us understand the quality of a manager’s decision-making skills.”
The psychologists examine what kind of decisions a manager makes, how they make them, and how sustainable and repeatable these decisions are. Stamford’s long-standing, tried and tested framework means it looks for 14 key characteristics, including attention to detail, curiosity and certain biases, when assessing whether a manager’s behavioral characteristics will lead to successful outcomes.
Stamford Associates has been working with psychologists for over 20 years, who look to pick managers who can turn out to be “future winners” rather than solely relying on “past winners”.
Gelber added: “Our long-term record suggests that we select successful managers 86 per cent of the time.”
In addition to this form of assessment, Stamford Associates developed a series of proprietary financial diagnostics which help to understand a manager’s investment footprint as reflected by their historic portfolios. These diagnostics and assessments “lead to a better understanding of the potential repeatability of favourable results over time in the future.”
Stamford Associates measures its added value “on the basis of picking managers who succeed in the future, and the 86 per cent success rate is a reflection of this.” Gelber stated that, on average, “80 per cent of global equity managers underperform their indices after fees,” so the firm has great difficulty finding managers who meet their challenging criteria, and is often “fishing in a very sparse pool.”
The company also insists on full transparency from its funds. Its managers must be open to answering all questions, “irrespective of how sensitive they might be.”
Gelber stated: “Given that the hedge fund and private equity spaces are not accustomed to full transparency, this further limits the ‘manager universe’ for our clients,” as Stamford Associates refuses to work with managers who do not commit to full disclosure and transparency.
Gelber told Hedgeweek, “Stamford Associates had some time ago an investment programme which employed 15 hedge fund managers at its peak. However, this was overly-diversified and wasn’t a good experience for the company.”
Regarding investment strategies, the company exclusively focuses on long/short equity, on account of it having identified “exceptionally talented managers, who focus on stock picking rather than macro strategies, and who have exceptional skills, especially on the short side.” These managers attempt to generate alpha for their clients, rather than being exposed to beta.
On macro-orientated strategies, Gelber commented: “We haven’t been persuaded to engage our clients’ assets in that space because of the difficulties involved in making economic predictions and ensuring that clients will benefit. Many of these strategies are not entirely transparent, and involve leverage, which we don’t like to get involved in.”
The current interest in a credit strategy has been considered carefully. Gelber mentioned that the firm “is not yet persuaded” by this strategy, despite researching it for the past 10 years.
He noted: “Whilst in theory fixed income long/short strategies could offer attractive diversification characteristics in an institutional portfolio, the universe of specialist managers who meet our selection criteria remains narrow. Many of the strategies we looked at apply leverage in an attempt to amplify returns. Furthermore, given the low rate environment, the risk-return profile does not appear conducive to embrace such strategies for the time being.”
When asked about client concerns over fees, Gelber said that any reservations need to be carefully managed, and that performance fees aren’t paid out when a client hasn’t benefitted. Their insistence on full transparency from their managers also avoids many client concerns.
Gelber told Hedgeweek, “transparency, granular analysis, alignment of interest between clients and portfolio managers, and the psychological assessment of key investment decision makers, are the cornerstones of Stamford Associates’ investment process – and these are simply non-negotiable.”
Regarding the future, Gelber said: “We have a clearly defined investment philosophy which we stick to, and which we consistently apply. We’re optimistic for the future.”