For those who attend investment seminars wanting to hear the speaker’s best five stock tips, this week’s presentation by portfolio managers at Sionna Investment Managers will have been disappointing.
But for those who wanted to learn how a value manager goes about its craft, about how decisions are made at what must be the country’s most diverse money management firm, the event was a winner.
“We don’t tend to highlight stocks, [to present] our five best ideas, because we don’t think that’s a good way to manage money and it doesn’t encourage the right type of investor behavior in terms of diversification. It’s more like speculation,” said Mel Mariampillai, a portfolio manager who studied science before obtaining his CFA designation.
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He has been at Sionna — a firm founded by Kim Shannon 14 years back and whose mantra is relative value, meaning that stocks revert to their mean, or intrinsic value, over time — since 2005. As a relative value manager, Sionna buys stocks when they are below intrinsic value and waits until they rise to that level. But when they get there, it doesn’t automatically sell the shares.
So with no Top Five list to present, Mariampillai focused on errors of the mind, those aspects that lead to irrational decisions, all of which be expensive for clients. And there are lots of such biases, ranging from recency, overconfidence (which results in too much concentration) sunk cost, loss aversion, blindspot, narrative (preferring a story over the data) and groupthink.
So how does Sionna, which manages about $4.5 billion of assets, ensure it doesn’t fall prey to such biases? It’s difficult, given that they’re part of human nature, but awareness is a good start. And it has developed a culture to fight them: for instance, it operates with group decision making (where all portfolio managers have a say, a method that deals with loss aversion bias), it has a system where the newest manager speaks first, where pre-mortems are the norm and where it hires green analysts (an approach that addresses the bias of the curse of knowledge.)
And it takes a long-term analytical view. On oil, for example, it didn’t accept the argument a few years back that it was heading for US$200 per barrel and the current view that will hit US$20 per barrel. It’s view, over the long run, is that oil will trade at its marginal cost.
“You look at long periods of history, because your mind is telling you only to look at recent history. That’s how you fight recency bias,” said Mariampillai, noting that concentration bias — which has dented the performance of Bill Ackman’s Pershing Square and John Paulson’s Paulson & Co. — is averted by minimum diversification requirements and maximum position size requirements.
Some stocks were mentioned: we know Sionna is underweight the banks but has exposure to Fairfax Financial and Great-West Life; that it has exposure to one telecommunications stock, Telus, but not BCE or Rogers, because the latter two have been avidly pursuing content; and that it sold its interest in Corus Entertainment four years back, not at the peak but at higher prices than prevail today because of the rise of streaming services and “because the risk was just too high.”
One other piece of stock information was handed out: the portfolio team hasn’t owned former high flyers, Nortel, Blackberry and Valeant — decisions which affected short-term performance but which had a positive long-term effect.