A meeting with Allan Gray analyst Rory Kutisker-Jacobson in the aftermath of the Mining Indaba revealed how the firm picks its people and then puts them through a process which tests to see whether they have the mettle to preserve the firm’s leading position as the country’s number one allocator of capital.
Kutisker-Jacobson has now been with Allan Gray for eight-and-a-half years and describes his experience after being recruited as being very much in a sink or swim environment.
One of the first assignments recruits may be given includes writing a note and presenting to the chief investment officer (CIO – currently Andrew Lapping) on which of the firm’s top ten holdings should be sold. “We are encouraged almost immediately to disagree with, or confront, one of the current investment hypothesis,” says Kutisker-Jacobson.
Far from this being for disagreement’s sake, this is done to encourage debate among the investment team and prevent personalities and/or seniority from obscuring the truth that can be gleened from a healthy intellectual debate. “We favour independent thought, and we want to encourage the younger members of the team not to be intimidated and be able to speak their mind,” says Kutisker-Jacobson.
From there, analysts are expected to write reports on companies they are assigned to cover. Allan Gray favours the generalist model where analysts and portfolio managers do not cover one sector, instead spreading their expertise across the breadth of the market.
The reports the analysts write are fairly concise in laying out the investment case, valuation and conclusion, but extremely well supported with data and additional information. “You write a report, and then you disseminate it to the whole investment team to read. At a policy group meeting, the analyst will give a five minute introduction before taking questions that can run for as long as an hour and a half, and some people may play devil’s advocate,” says Kutisker-Jacobson.
Over a period of two years, analysts will be expected to write between 10 and 12 company reports. “We think that is a sufficiently long period of time to analyse the quality of their research,” says Kutisker-Jacobson.
The analysts are evaluated with more emphasis on the quality of the idea as opposed to the outcome, as investing (like many activities involving a large degree of uncertainty) means participants can enjoy the right result despite drawing the wrong conclusion, and vice versa. “Or you could get the outcome wrong, but you highlighted a risk that materialised as a potential threat to the investment case,” says Kutisker-Jacobson.
A case in point: valuing resource companies. The view of the direction of commodity prices could be wrong given the volatility of these prices, and this could change the conclusion made by the analyst.
Historically, as few as one out of every three or four analysts was retained after the two year assessment period. However, with improvements and refinements to the hiring process, the retention rate is now over 50%. To develop portfolio management skills – which are considered quite different from analytical skills – analysts will be given paper portfolios to manage in “real time”. “This means we take into account liquidity. So if you want to buy a midcap company, and its going to take you the better part of a year to build a position, then that’s how long it will take for you to include it in the portfolio,” says Kutisker-Jacobson.
Where an analyst’s paper portfolio differs in substance to the ones the firm is managing, analysts will write a brief note on the reasons for the difference. “Once you have run a paper portfolio for a couple of years and demonstrated that you can deliver alpha (returns above the market or index), then you will have a very good chance of becoming a portfolio manager,” says Kutisker-Jacobson.