There is this joke: There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning boys, how’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and says, “What the hell is water?”. – David Foster Wallace
Being aware of the water we swim in, the environment within which we are trying to be successful, is very important. Having become acutely aware of this, we needed to change the water we swam in. At our new home RWC, the team has picked up where we left off, with the same philosophy and process we have always followed, and though much is the same on a day to day basis, the water could not be more different, more appropriate, more invigorating.
The most important change has been that of ownership. As a limited liability partnership, RWC is majority owned by its staff. At the team level, because of the revenue share structure, the team has become owners of our own business. This affects almost everything, from the corporate to the team level. It creates a common goal and genuinely aligns the success for clients with that of the company and the team. It establishes clear responsibility and simple transparency, which in turn influences decision-making and capital allocation.
For this thought piece, let’s focus just upon the team level effects.
At RWC we are now a discrete team. All the responsibility lies with the team, the complete process, the complete philosophy and obviously the outcome. We believe that, for a process to have a chance of success, it is imperative that it is applied consistently to each investment decision, that the whole team follow that same process, that the whole team aim for a common goal, and that the whole team share equally in the ownership of that process. Under this structure, cognitive diversity has the chance of success, as everyone is trying to solve the same problem (the common goal).
This in turns helps create an environment of team ownership and thus is able to remove the culture of blame. It allows for openness in debate and criticism, for one is critical of the process not an individual. This is hugely important, as it allows for the whole team to be able to learn and evolve with the repetition of applying a consistent process within an emotional safe space.
By having this generalist approach, the team has greater insight into the connectivity of each element of the process. It provides a structure that allows for each idea to be compared to another on a like for like basis which better informs of the risks and opportunity costs of each decision.
Further, it is clear to the clients with whom they are placing their trust; with whom they hold responsible for the management of their monies. We feel that this clarity of responsibility is an important change and one that improves the likelihood of being able to replicate success into the future and to foster a client relationship based more upon a partnership rather than simple AUM.
Previously the flow of the water was to attempt to break down into ever smaller pieces every aspect of the team’s philosophy and process. The temptation when given the power of data is to try and measure everything on the assumption that everything is worth measuring. By breaking down each and every element of a process, one presupposes that each element is distinct and unrelated. For example: stock selection by multiple specialist sector analysts, ESG concerns governed by an independent team, risk in the portfolio governed by algorithms, quants and efficient frontiers. Each of these components can surely be fulfilled to their most successful, measured individually to provide complete accountability and transparency. The belief is that specialists in each and every element will logically deliver the very best outcome within each element and naturally therefore for the final complete outcome.
Then once such building blocks are complete, one can build many outcomes surely. This certainly becomes the economic imperative, so one can support the cost base of multiple specialists. Yet this introduces a further level of complexity. Tasking each specialist with multiple different approaches and desires, further dilutes the chance of the specialist being successful, and even begins to undermine whether they ultimately become a specialist in anything at all! For example, think of an analyst asked to find the best growth stock one month, then the best value stocks, then income and so on. A difficult ask we would argue.
With specialism, responsibility for each step of the process is disseminated to such a degree that it becomes difficult to determine who ultimately has the ownership. Who is responsible for comparing the ideas and how is that possible when so many are involved in the process? Who owns and controls the common goal when each distinct element has their own individual and different philosophy and process? How can there be a common goal when each has their own individual goal and how can these all be aligned with the interest of the client? Further by diluting responsibility, one ends up having to create structures of KPI’s in order to re-introduce accountability, to measure each specialist’s effectiveness and success. With so many individual elements and so many specialists, each ends up creating their own bespoke KPI’s. These then become so prolific that the result is each individual indicator ends up meaning practically nothing, for no single KPI has any materiality to it anymore.
This structure is more likely to lead to a blame culture, as it lends itself to trying to attribute where things went wrong in isolation, at which specific step in the process and thus with whom that specific step lies. We believe that when one devolves responsibility, one is more likely to apportion blame. This culture makes it harder for such larger teams to learn from mistakes as honest criticism is hard to achieve in such a framework.
The client too is faced with the challenge of understanding who is ultimately responsible for their monies, their outcomes. This aspect becomes most pronounced at difficult times. Are those individual’s aligned philosophically with the objective of the client, or do they have multiple objectives to try and serve?
Certainly, this specialist approach can work, and nature provides incredible examples of such. The success of ant or bee colonies where each individual has a specific task to fulfil are obvious examples. Yet the reason for their success is the common goal they share. From an investment management approach, this is key if the route of specialism is to be effective. A single common goal, which achieves scale to be able to support the cost base of multiple specialists. Examples of such success exist in the investment management world certainly, but we do not believe that statistically this is easy to achieve.