“Past performance is not indicative of future results.”

As investors, we’re all familiar with this standard disclosure language. But it begs the question, Why are so many allocators driven by track record?  Is the oft-quoted phrase simply incorrect, or is the reliance on track records so persistent precisely because it provides comfort with an easy-to-assess data point? 

In our experience, an approach overly focused on historical track records can lead investors to stipulate arbitrary and even counter-productive track-record requirements for managers.  This is explored in a recently published paper, “Life Cycle Performance of Fund Managers,” where data supports that a fund’s peak performance on average occurs within the first decade of its life cycle^[i]. 

At Crewcial Partners, we approach our process differently.  To put it simply:

• We are on the hunt for great investors, period; we are not beholden to style boxes or arbitrary metrics such as the length of a track record.

• We are driven by prospective absolute returns.  The result is eclectic portfolios that do not neatly fit into an easily categorizable box; a continual search for great investors is the sole common theme. 

As unbroken, consistently strong outcomes are unable to be achieved by the very nature of markets, this approach, in part because it is different, understandably leads to many questions.

Why? 

Through our four decades of experience at Crewcial Partners, we have learned many lessons.

1. Investing with the vast majority of investment managers is a losing proposition.

• However, there are exceptions. Beyond widely known investors such as Buffet, Munger, and Lynch, many, many others, particularly in niche areas with responsible levels of assets, remain under the radar despite the outsized outcomes they’ve been able to generate over time. These partnerships can have a massive impact on a diversified endowment’s track record. 
• For a quick example, let’s assume a portfolio of 20 funds, each at a 5% allocation.  If the allocator identifies one great investor in this group able to compound capital at double the standard 8% market return while all the other investments equal the market, at the end of 20 years, the endowment will have generated current wealth 16% greater than that of any peers who simply matched the market through this period.  
• While the outcome above is undoubtedly a success, what happens in a scenario with some disappointed outcomes mixed in as well? Using the same basic premise laid out above, let’s adjust the scenario to encompass one underlying investor that is able to double the standard market return and one manager only able to generate half of the market return. The cumulative additional wealth generation is still an impressive 13%.  Even taking the scenario one step further, with an allocator that selects one winner (double the market) and two losers (half the market return), the cumulative additional wealth generation is still 10% greater.  This reflects a massive impact when we consider endowments are operating in a range of tens to hundreds of millions of dollars. 

2. There is no one-size-fits-all definition of a great investor.

• As stated, exceptional investors make up a very small subset of the massive investment management industry.  Crewcial Partners seeks to learn from history, striving to uncover the various differentiators that collectively take managers from average to excellent.  We’ve learned that factors like team size, experience, education, professional background, and recent track record offer minimal selective value.

3. Extraordinary managers have one thing in common: a disciplined, focused approach. 

• They are patient, understand that the price paid for a stock matters, and ignore distractive short-term noise.  Just as importantly, they understand that less than 1% of all publicly listed stocks have accounted for 50% of all wealth creation over the last 100 years,^[ii] and see excessive diversification as a sure path to weaker outcomes. The broader market consensus does not interest them, and they will often have a contrarian streak, remaining indifferent to appearing incorrect for what would otherwise be uncomfortable periods of time for outsized returns.    

How do we find these standouts? 

Just as great investors come in all shapes and sizes, the team at Crewcial is a diverse group of individuals with various life experiences, educational and cultural backgrounds, and skill sets.   

This diverse thinking is evident in our process:

• Some team members spend their days reading manager letters, watching interviews, and scouring blog posts in hopes of finding unique insights from under-the-radar investors.

• For example, a post on an innocuous value-investing blog turned our attention to an up-and-coming boutique global management firm located in Boston that has become a staple in many of our clients’ portfolios.

• Other team members spend their time traveling the world, meeting investors in Europe, Asia, Africa, and South America and pursue a winding road of interesting (and many not so interesting) candidates.  

• Still other team members will attend industry-focused conferences or screen databases to quickly vet the ever-growing manager universe, leaving no stone unturned. 

Since each team member takes their own discovery path, this diversity of thought creates an environment where collectively differentiated thinking is strongly embraced. 

As noted above, we place less weight on metrics; we approach our due diligence inquisitively, asking probing questions, pulling each thread to unravel each investors’ thought process, underlying skills, behavioral biases, and defining temperament.  We study their prior writings and commentary to assess their analytic quality—how their thinking has evolved and how it shapes them for future success.  Ultimately, we are looking to determine if they possess the investment acumen and perspective to separate themselves from the pack and the discipline and conviction to stick the landing. 

While the search for the next great investor is never-ending, our decades-long focus on uncovering these strategies has allowed us to build a culture that recognizes the challenges of finding such firms while reflecting the confidence born from past success.  We’ve also become deeply embedded in an ecosystem of such firms, providing us with strong comparative experience and the ability to cross reference ideas on many levels.  While we don’t anticipate all these firms will turn into the next Warren Buffet, Peter Lynch, or Nicholas Sleep, the upside for being right even on a smaller scale is a game-changing proposition for long-term value creation.

^[i] Huang, Rose Ruoxi and Jie, Elaine Yongshi and Ma, Yue, Life Cycle Performance of Hedge Fund Managers (November 10, 2022). Available at SSRN: https://ssrn.com/abstract=4288472

^[ii] Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2900447 or http://dx.doi.org/10.2139/ssrn.2900447