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The Source Podcast: Evaluating concentrated vs. diversified managers with Hosking Partners
28 October 2020

(20 min podcast) In this episode of The Source, eVestment’s podcast covering trends and insights and institutional investing, we’re joined by Luke Bridgeman, portfolio manager with Hosking Partners, a global equity manager based out of London. Hosking Partners offer a single global equity strategy with a diversified approach. While we see a lot of consultants and investors searching for concentrated portfolios, Luke and his team have taken a contrarian approach with a very diversified portfolio.

``Obviously it’s important for us to get our data in front of consultants and potential institutional clients. Databases provide us with really valuable market intelligence on up-and-coming search activity. It's also really helpful for us to understand the competitive landscape.``

In preparation for this conversation, we looked at search activity in the eVestment database with our Advantage solution, where you can readily see how much activity a given firm or strategy is getting from eVestment users – and Hosking is attracting attention. They are in the 15th percentile of all managers when it comes to the number of reviews that they’re getting in the eVestment database. Even in a space where we see allocators looking for concentrated strategies with less than 100, 75 or 50 names in the portfolio, their global equity strategy is competing with the diversified approach.

As you’re listening, if you have any questions about how you can see the amount of activity your firm is getting from consultants and investors, or what criteria they might be using in their screens, please reach out to solutions@evestment.com.


Rich: Luke, thanks again for joining us. Before we jump in, can you give us a little bit of background about your role?


Luke:  Sure. I’m one of the five portfolio managers here at Hosking Partners. We’re a long-only, London-based firm managing about $7 billion. We’ve been together since 2013, having founded the business together and we’re slightly different from other firms in that we have a single product, which is global equities. We manage that with a very diversified portfolio with a large number of stocks.


Rich: I was doing my homework this morning and I think it’s currently 490 or so names in the portfolio, which is pretty high when we look at what people tend to see in terms of a concentrated portfolio. What is your overall philosophy around that diversification? Because 490 is a lot.


Luke: That’s right. The 490 is made up from the five of us, so we’re each autonomous portfolio managers in what we call a multi-counselor structure. Managing their own portfolios, which vary in size between 100 and 200. Then they aggregate to the overall portfolio, which has about 490 stocks, as you mentioned.

The trend in the industry has been for portfolios to become more and more concentrated over the years. If we look back 15 years, then the proportion of portfolios in global equities, which had fewer than 50 stocks was around 22%. Over the last 15 years, that’s risen to more than half of all portfolios. Then correspondingly the number of portfolios which have more than a hundred stocks, which is not a huge number compared with what we have, has fallen from at a quarter to 10% of all global equity portfolios.

That’s really the trend in the industry. We, among other things, like to be contrarian. We see that as a virtue in itself, but that’s not the real reason why we have such a diversified portfolio.

There’s a study, which was picked up by the CIA and actually published in a book, which I think is called Intelligence Analysis. Like us, the CIA have the challenge of gathering data about the world around them, processing that, and then coming up with actionable decisions. They were looking at the ability of human beings to predict the future. To a certain extent, that’s what investment’s about. They got together eight horse race handicappers, whose job is to predict the outcome of horse races and went through an experiment with them where they got the results of a number of different horse races and asked the handicappers to predict the outcome.

They gave them a list of all the data variables which were potentially available. The weight of the horse, the position in the last race, that sort of thing. They asked the handicappers to rank those variables in order of importance, which they did. Then they went through this exercise of giving them the five most important variables for all of these races and asking them to rank the winners and the losers for each race, which they did.

Then they went through the exercise, giving them a lot more information. About half the potential variables so that they potentially had access to all of the information. The outcome was that there was no increase in forecasting accuracy. Of the eight handicappers, three actually did less well when they had all the information compared with they had just the five most important pieces of information. Three did no better, and no worse, and two actually slightly improved.

For us, the lesson is, in an investment context, more information doesn’t lead to an increase in forecasting accuracy, but what it does lead to is an increase in confidence. You potentially are taking on more risk without a commensurate increase in return. In simple terms, we would prefer to make a large number of bets where we’re broadly competent rather than a small number of bets where we’re very confident. Assuming that we have skill, which is obviously a major assumption. That’s really the background of our having such a diversified portfolio.

We believe that as global generalists where we’ve given ourselves the broadest possible opportunity set, we should take advantage of that through this diversified portfolio, where we were able to really to find the best ideas and being as unconstrained as possible in what we’re able to achieve. The way we do that as a firm is we lean very heavily on a concept called the capital cycle, which is a way of looking at the world, really focusing on supply rather than demand. That sort of acknowledges that industries and situations with high returns tend to attract capital, which drives down returns until the point is reached that capacity within that industry has reduced to the point where returns start to improve and the cycle begins again.

By comparing what that tells us about future returns, with what the market’s telling us in its prices about where it thinks returns are going, we are able to see the bigger picture and find opportunities that way and that’s really the heart of our approach to investment.


Rich: I think the comparison to the CIA is very interesting. Jumping ahead, I can see you on screen here. Are you in the office currently?


Luke: We have been in the office since September as a team. Then the status of the lockdown in London has changed a little. From a few weeks ago, the majority of the office has gone back to working from home. I live in central London. It’s very easy for me to get into the office. It’s a little bit more productive here than at home.


Rich: What are some of the tactics that you employed earlier on, as things were totally shut down, in terms of communicating with your clients and prospects?


Luke: We got our heads around Zoom and Microsoft Teams and that sort of thing fairly early on. I mean, it’s been a steep learning curve for us. Ideally we like to meet in person, but that’s not been possible. With no clients coming through London, we’re doing no traveling. We’re not going to conferences or on trips. We’ve had to lean quite heavily on Zoom and Teams and that’s had pluses and minuses. I mean, we’ve been able to fit a lot more into the day. We’re spending less time in airports and on trains, but the format of meetings becomes quite similar and you have fewer of those random encounters, which is something we miss. I think we probably get a little better at using the technology and understanding where it can be used best. We’re all looking forward to days when we can actually meet up with clients, because asset management is a people business.


Rich: Do you think any of this is here to stay? Like once the world’s back to whatever the new normal is, what do you think we’ll have adopted permanently out of this? Do you think there will be much more virtual interaction maybe earlier on in the due diligence process? Or do you think it will be back to those just overall in-person meetings?


Luke: I think in-person meetings will always be superior. If you have the time and the resources, then it will generally justify that the extra resource which may be involved in meeting face to face. The convenience, hopefully we will hold onto. We will be continuing to do these virtual meetings. But I think if you want to find out that much more about a manager, or if you want to get in front of some client ahead of one of your competitors or make a pitch, whatever it is, then getting on an airplane is always going to be the best idea. Who knows when things will recover and as a society, how we’ll learn to live with the risk, which this pandemic represents, but I think we’ll hopefully keep the best of what we have, but find out how to recover what we were doing before as well.


Rich: How are you guys leveraging third-party data sources like a database like eVestment? I know with a single strategy, maybe your marketing strategy and tactics are slightly different than a much larger manager, but how are you leveraging databases in that marketing plan and competitive analysis?


Luke: We use databases for several purposes. Obviously it’s important for us to get our data in front of consultants and potential institutional clients. They provide us with really valuable market intelligence on up-and-coming search activity. Because we’re a one product firm, global equities, we are always looking for potential clients and consultants who have an interest in global equities.

Then it’s also really helpful for us to understand the competitive landscape. As you mentioned, there’s always a great deal of search activity for concentrated portfolios, which in a contrarian way we see as a good sign. Because we are convinced of the value of diversified portfolios, then we’re keen to get our diversified portfolios out there and the opportunity to convince potential clients of the value of being able to invest in neglected stocks to which concentrated managers simply don’t have the risk appetite.


Rich: I was looking into the search activity for your strategy this morning. When we look at the number of stocks people are searching for in a portfolio, it kind of caps out at a hundred. I know you talked about it a little bit at the beginning, but maybe we could come back to overall for the investors you’re talking to, what is the value of that diversification? You talked about having a little bit more conviction?


Luke: One of the reasons why we believe so strongly in diversified portfolios is as a way of avoiding overconfidence. One argument in favor of more concentrated portfolios is that it’s a sign of analytical rigor. If you’re any good, you should believe in what you’re doing and you should be comfortable with the higher risk, which having a more concentrated portfolio has.

We don’t take that view as I mentioned. We think that has a number of drawbacks in terms of portfolio or manager selection in terms of if you’re going to have more risk in each individual portfolio, then you’re maybe going to be hiring more managers, which may reduce the overall active risk in the portfolio. You’re left simply with the higher fees of concentrated managers without the commensurate returns.

We also believe the concentrated managers tend to fish in the same pond as each other. They tend for capacity reasons to be looking at the same larger, higher quality, perhaps growth, more liquid stocks and neglecting stocks in the rest of the universe. As we say, we like to go where the fish are rather than where the fishermen are. We believe that a diversified portfolio can accommodate more risks than is possible in a concentrated portfolio.

Whether we’re talking about size, so we have a greater proportion of smaller mid-caps in our portfolio with some market caps as low as a hundred million; country, we’ve had an overexposure to emerging markets over the last few years. Some of our more successful stocks have been in emerging markets.

Leverage, we say that if a certain proportion, if one or two of our companies aren’t going bust each year, then we’re not taking on enough risk in the portfolio. And liquidity likewise, we are comfortable with stocks which might have a smaller free float than others. Often we see illiquidity as the absence of sellers rather than the absence of buyers and the potential source of alpha.

Availability of information, I mean, just because we don’t have all of the information to complete a 20 page report on a company, doesn’t actually mean that we should rule it out if there’s a sufficiently compelling thesis, which we can get comfortable with and cyclicality and volatility in returns. I mean, one of our themes at the moment is shipping, which has underperformed for many years because the overcapacity in the industry from before the financial crisis, but it’s starting to come good.

Those are the things which we’re able to do, which I think others aren’t able to do. They’re a potential edge, a sort of comparative advantage, whatever you want to call it.


Rich: We’re always getting asked about ESG. We hosted several panels at FundForum last week and it came up in every one. Is ESG something that you’re considering in this portfolio as well?


Luke: Very much so. I mean, ESG is something we’ve never really broken out separately, but it’s very much integral to the way we look at companies. Because we have this diversified portfolio, almost inevitably we have a longer holding period than other managers and through the cycle, less about a 10-year holding period for each stock, on average. Sometimes slightly longer, sometimes shorter, depending on where we are in the market.

With that, paying attention to these softer themes is incredibly important. As well as thinking about the financial statements, we are thinking about governance, ownership, alignment of interests that are absolutely critical to the way we think about things, treatment of minority investors, especially in situations where there may be a majority shareholder. We need to be comfortable to that as the majority shareholder who acts rationally and virtuously, rather than the other way around.

Environmental factors are absolutely key. They may not be reflected on the balance sheet, but the risk of stranded assets or of improper behavior coming to light is something which very much affects the long-term investment thesis. Likewise being a good corporate citizen. If you’re not doing the right thing, then eventually it’ll come back and bite you. We’ve always considered these issues as part of our ability to step back and look at the bigger picture. In terms of the more recent emphasis, which ESG is receiving in the wider community, for us, it’s nothing new. We feel that is something which has always been part of our process.


Rich: I know Europe and the UK are light years ahead of the US in terms of that. The answer tends to be, it’s always been part of the consideration. Not so much over here. Well, this is really interesting. I think it’s paying off for you guys. I don’t know if you’ve seen it recently, but you’re in the 15th percentile, in terms of managers getting activity in the eVestment database. That’s something we look at a lot just as indicative of future investment behavior and trends. There are eyes on you. Hopefully good for you to hear.


Luke: That’s encouraging.


Rich: Well, I appreciate you taking the time to talk to us today. We’d hopefully love to have you on and do it again. Maybe if the world ever gets back to traveling, we can do one of these in-person.


Luke: Thank you. I enjoyed it and it was good to speak.


Rich: Hopefully this episode with Luke provides some insight into the types of information to consider when evaluating concentrated versus diversified managers, and the pros and cons of both. The eVestment platform gives asset owners access to this information to help make more informed decisions, and also provides managers with competitive intelligence to help them differentiate themselves.

Reach out to us at solutions@evestment.com for any questions about how you can get access to that information. I want to thank you for listening and we look forward to hearing from you soon.

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