Why Our Investment Team Structure Helps Us Make Better Decisions
By Keith Lee, President, Chief Executive Officer, Chief Investment Officer and Senior Portfolio Manager
Imagine that you work at an asset management company and you are in a difficult three-hour meeting with some colleagues. The topic of discussion, which has become quite heated, is whether you should add a certain company to a portfolio your firm manages. You yourself have spent months researching the company, and by now you know the business inside and out. You think the company is a terrific candidate for the portfolio, and the rest of the group agrees, with one exception. One person says he is just not “there” on the company, despite the fact that the group has met several times previously to discuss the name. Your patience is running low. What do you do?
Many people in our industry would say that it depends on several things, such as roles—your role and that of the holdout. If you are a portfolio manager (PM), for example, you might go ahead and make the decision on your own. If, on the other hand, you are a research analyst and the skeptic is in fact a PM, you might redouble your efforts at persuading him or her, or you might withdraw the recommendation altogether to save time and face.
Despite the many unknowns in this hypothetical, we think the answer at Brown Capital is simple: Do more work, address the outstanding questions and reach consensus. We think making decisions by consensus brings us significant benefits, as we will discuss below. Importantly, our reliance on consensus only works because of the specific way we structure our investment teams. This note explains why that is by exploring three aspects of our team structure at Brown Capital: our use of teams instead of individual portfolio managers (PMs); the dual-role analyst/PM responsibilities of each team member; and the fact that team members are generalists, as opposed to industry or sector specialists. As you will see, our structure differs from that employed by many other asset managers, offering both advantages and disadvantages when it comes to decision-making. What is most important is that we think our structure best fits our research process surrounding Exceptional Growth Companies (EGCs) and our firm’s culture.
Teams vs. Individual PMs
All of our investment strategies are managed by teams of co-equal portfolio managers, as opposed to solo PMs. Each team member shares full accountability for the portfolio, and portfolio decisions are generally made by consensus, as mentioned. To make consensus work, we require team members to come well prepared to argue passionately for or against ideas, and to resist the temptation to go along to get along. Culturally, candor in pursuit of truth and the affinity with colleagues to have challenging conversations are part of our DNA. When consensus is not yet achieved on a decision, the team goes back and does more research and analysis to achieve greater understanding, a process that may take up to six months. Each team has a team leader who helps coordinate the team’s research and trading decisions. In the very rare instances where the team cannot reach consensus, the team leader ultimately makes the call, but this is the exception, only occurring a handful of times in our firm’s history.
We think that our use of teams brings several advantages. First, teams making decisions by consensus irons out the individual biases that team members may have, either toward or away from certain companies, industries or ideas. Second, having teams of equals avoids any “star system” in which some individuals get special treatment, and the associated “key-person risk” to Brown Capital if a PM leaves or is out for an extended period.
Dual-Role PM/Analysts vs. Separated Roles
At Brown Capital, each team member serves in a dual-role capacity. First, each member acts as a PM, weighing in on buy/sell decisions, monitoring the portfolio, meeting with clients, and more. In addition, each team member also functions as a research analyst, looking for new ideas, covering existing holdings, and staying abreast of industry and competitive developments. While hardly unique, our dual-role structure differs from the model often found at larger asset managers, who typically have large centralized pools of industry-specific analysts who in turn support PMs managing a variety of investment strategies. Of course, structures vary across the industry.
We think our dual-role structure prevents any information loss between the research function and portfolio decisions. Our structure also imposes total accountability. No one can blame anyone else for shoddy research or poor portfolio-management decisions. In addition, there are no professional incentives to get names into portfolios, as is often the case with standalone research analysts, who may be compensated based on the number of “their” companies that wind up in portfolios. Those pressures may result in unnecessary portfolio turnover.
Generalists vs. Industry Specialists
Finally, each Brown Capital team member is a generalist, covering all types of companies, instead of specializing in just one sector and industry. In fact, our consensus approach to decision-making is predicated on the generalist model, as the entire team must know each company in the portfolio. For efficiency’s sake, individual team members have research-coverage assignments of specific companies. Assignees share their research and models with their colleagues, and the teams meet frequently to discuss the analysis. We rotate assignment of names to keep the research fresh and to make sure no team member has fallen blindly in love with a company. To further boost productivity, we also tap expert networks on occasion where industry expertise might prove insightful.
We think the generalist model frees up team members to find the best EGCs whatever industry they might be in, suiting our bottom-up portfolio approach. Being generalists also gives team members the ability to apply the known dynamics and trends from one industry to another. Fresh perspectives help us avoid tunnel vision about the way an industry or company works. Finally, our structure mitigates the impact of any employee turnover, as the rest of the team has visibility into the research their colleague has been doing.
Of course, there are downsides to our approach, too. Chief among them is speed. Consensus imposes a more deliberate pace of decision-making than when individuals make the call. However, given our long-term approach, in which we often hold positions for years and even decades, we think fewer, slower, more informed decisions are better than rash judgments. A related downside is scalability, as team members need to get up to speed on a variety of companies. Mitigating this challenge, though, is the fact that we manage concentrated portfolios. In our portfolios, we own 40-60 holdings and we add an average of just 4-6 new names a year, all of which must meet our criteria of what makes an Exceptional Growth Company. So it is not like we need to cover every company in every industry, sector, country or benchmark. Finally, our structure makes it somewhat more challenging to find new team members who are both skilled analysts and capable PMs, and who also fit well within the team structure and firm’s culture. Thankfully, as a stable, boutique firm, we do not have reason to alter the composition of our investment teams all that often. However, when we do, we make the decision—as you would expect—as a unified team.
Brown Capital Management, LLC ("BCM") is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about BCM, including its investment strategies, fees and objectives, can be obtained by visiting www.browncapital.com. BCM’s Form ADV contains information regarding our business practices and background of our key personnel. Form CRS contains key considerations for retail clients. A copy of BCM’s Forms ADV Part 2 and Form CRS is available, without charge, upon request or by calling (800) 809-3863.
The opinions expressed are those of BCM. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of BCM’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.