Key facts
- Kate El-Hillow, CIO of Russell Investments, outlined criteria for evaluating underperforming funds.
- She stressed the need to differentiate between a manager making a bad investment versus a bad decision.
- El-Hillow emphasized that fund managers must remain true to their core strategies.
- The size of a fund's position and appropriate sizing are crucial for weathering market volatility.
- Transparency and clear communication from managers during choppy performance periods are paramount.
- Russell Investments utilizes separately managed accounts to gain real-time insight into fund holdings and exposures.
Kate El-Hillow, chief investment officer and president of Russell Investments, has detailed how institutional investors should evaluate funds that are experiencing significant downturns. Russell Investments manages $418 billion and also invests in other fund managers.
El-Hillow emphasized that not all fund meltdowns are equal, and the key is to discern whether a manager made a bad investment or a bad decision. She stated that it is crucial for investors to ensure that the managers they hire remain true to the strategies for which they were initially selected.
Understanding the exposures, leverage, and risks associated with individual investments is vital for protecting the broader portfolio. El-Hillow noted that a significant loss does not automatically lead to redemption but can serve as a wake-up call for funds that rely solely on good ideas to succeed. Structuring and risk management are equally important considerations for Russell Investments.
She explained that while conviction in a particular stockpicker is important, the way a strategy is executed and its inherent riskiness must be managed. Appropriately sizing positions allows investors to remain invested during difficult periods. Issues arise when funds trade irrationally due to market volatility, and how managers navigate these situations is telling to allocators.
El-Hillow also pointed to the importance of understanding founders' incentives, particularly how hedge funds earn performance fees above a high-water mark. She questioned whether managers take the right kind of risks or outsize risks to recover from losses. Monitoring staff turnover following significant drawdowns is another data point for allocators.
Communication and transparency are paramount. Russell Investments often partners with hedge funds through separately managed accounts, providing real-time visibility into holdings and exposures. El-Hillow stressed the need for clear and prompt communication regarding performance, tweaks to investment theses, and the rationale behind managers' actions.