Dear Investors and Friends,

 

At Variis we have a team managed investment approach. In this letter we explain why we use this approach, as well as provide detail on how we work together to make investment decisions and structure the portfolio. We’ve observed from our conversations with allocators that this is an area of significant interest, with some positively inclined and others less so.

 

We present our thoughts on this topic along the following six aspects:

• How Variis is organised to make investment decisions

• Devil’s advocate: the case for a single manager approach

• Why Variis uses a three-PM team-managed investment process

• Optimal team size considerations

• Behavioural benefits of team decision making

• Complementary skillsets on our team

Our intention is to share our thought process in a balanced and transparent way to help current and prospective clients assess us.

 

How Variis is organised to make investment decisions

Variis’ strategy is team-managed by three Partner PMs—Leila, Eko and Rufus--investing within their circles of competence, all of whom act as analysts researching business fundamentals.

 

Focus list

Each PM is responsible for roughly an equal portion of our approximately 100-120 name Focus List of high-quality EM businesses that we aspire to own at the right valuation. All the Focus List names have detailed investment case write-ups as well as three-scenario valuation models uploaded into our cloud-based process management platform.

 

Ideas are circulated and discussed before being added to the Focus List. The team sits together in our open-plan London office, and our working approach includes on-going daily discussion of ideas moving towards Focus List inclusion. Each PM is empowered to introduce Focus List ideas.

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Strategy investments

We populate our investment strategy exclusively from the Focus List. When a Focus List idea shows compelling upside versus existing investments, the responsible PM recommends that idea as a new investment. We have a team discussion around whether, in the context of risk diversification and our commitment to maintaining a concentrated investment approach, another investment should be sold to make room.

 

The sizing of all strategy investments, whether new or existing, follows our multi-factor sizing framework, which includes: (1) valuation; (2) quality; (3) conviction; (4) associated risks such as overlaps with existing holdings; (5) manoeuvrability limits. There is of course room for judgement, but the framework ensures consistency across the team.

 

Investment decision making

Our approach to team decision-making is informed by our extensive prior experiences, as well as our knowledge of how other firms operate. First, we believe it is important to avoid the model of 3 PMs making wholly independent decisions. Not only does a siloed approach miss out on the behavioural benefits of teamwork and the intellectual rigour of peer challenge, but it may plant the seeds of mutual resentment when things go wrong. Collective responsibility for performance is key. Second, we avoid a requirement for unanimity. We believe that if we were restricted from action except where all three of us are enthusiastic supporters, the bias to inaction would be too strong. We don’t want to get stuck.

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Our approach is to debate ideas in depth, but also to defer, within reason, to the lead PM on the proposed idea. While PMs are familiar with all the Focus List names, the named lead is the one who has led the work, interacted most with the company, carried out the detailed financial analysis, travelled to learn more, and spoken to a variety of experts. Our collaborative working practice is to share meetings and discuss investment ideas even at the early stages, which we believe builds team understanding and buy-in.

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In the rare case where disagreement about a new idea or a holding is unresolvable, we have empowered Leila as CIO to take a final decision (the Veto). It’s important that one of us has an explicit ability to move us clearly forward, though we expect this will be infrequent given the multiple stages of discussion that precede a stock action/recommendation.

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Fresh look process

We also have a Fresh Look process for single stocks where the investment has suffered a significant loss. Another team member re-underwrites the investment case and recommends action if appropriate. The re-underwriting includes reviewing primary sources and rebuilding the investment case and model from scratch.

 

Devil’s advocate: the case for a single manager approach

Rufus began his investment career at Fidelity and remembers the late Edward Johnson III saying (approximately) “two people can’t play one violin” to explain his preference for single manager funds. It turns out this isn’t an unusual sentiment among allocators.

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Allocators may have legitimate concerns about team-managed investment processes. These concerns may be expressed anecdotally, for instance citing a team that couldn’t agree on investments or fell out during difficult performance periods and went their separate ways. Our experience has been that as allocators learn about Variis’ team managed approach, these concerns are effectively addressed.

 

There are many successful team-managed investment organisations. Eko comes from Generation Investment Management, where the Global and Asia funds, which have had strong long-term performance, have several PMs. And before Generation, Eko was at Capital Group—a storied organisation that embraces a multi-PM approach to portfolio management. Rufus has come to Variis after a decade at Genesis, which over 30 plus years has an excellent track record, managed by a larger team of approximately 8 PMs. Berkshire had both Warren and Charlie, and now Todd and Ted as well. Even Fidelity has largely moved towards a multi-PM approach on many funds!

 

The concept of a star, we suspect, underpins some people’s preference for a strategy with a single manager/decision-maker. We’re more of the opinion that we’re all mere mortals and need all the help we can get.

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Why Variis uses a three-PM team-managed investment process

At the outset of our journey, our shared vision was a team-managed, fully partner-owned business managing a single, high-conviction, quality-oriented long-only global EM strategy. From prior experience, we recognized that there are about 100-120 high-quality, privately-owned, EM-listed businesses within our circles of competence. Having three PMs, each covering around 30-40 Focus List names, would be the optimal approach.

 

EM particularly suited to a team-managed process

One of the distinguishing characteristics of global EM is diversity. In fact, that characteristic is one of the reasons we selected the name Variis. Each of the many countries in which we invest is quite different: in language, culture, history, economy, market landscape & etc. This makes Global EM investing quite different to single country approaches, and to developed markets. We believe that having diversity in the team, and an element of specialisation, puts us in a better position to manage this diversity. In our case, Leila has long experience in the EMEA and Latam regions, while Eko and Rufus have historically been more focused on Asia.

 

Variis’ stability and future

Single PM processes have an inherent risk—shooting stars burn bright, but only for a moment. We believe that our team approach ensures more stable decision-making quality and provides protection against unforeseen circumstances. In the event of an unexpected absence, we are confident that our clients would still be well-served.

 

The difficulty with analysts

We don’t have analysts working for us, rather we are the analysts. Through personal experience we are all too familiar with the lure of, and problems with, analyst-based investment team structures. The lure is that PMs, supposedly with more experience and better judgement, can leverage the productivity and detail-orientation of analysts to turn over more stones, dig deeper and, hopefully, make better decisions. The problems are myriad but boil down to incentives.

 

Our experience is that it’s basically impossible to set up a clean incentive structure for analysts that also aligns with clients. PMs don’t always follow analyst’s recommendations—otherwise there is no need for the distinction between the two roles. If analysts are only measured on client impact, this creates an incentive to overstate conviction, or even conceal flaws, to at least get optionality on impact. The incentive for an analyst is to aggressively market ideas. If analysts are instead measured on a mock portfolio, that is necessarily divorced from client results. Imagine getting a bonus for a stock that wasn’t in the portfolio! These PM-analyst incentive issues are thorny, in our experience, at firms that use this structure.

 

We believe that combining the PM and analyst role not only creates the right incentives, but also ensures that PMs themselves are the source of insight and conviction.

 

Optimal team size considerations

We have considered representative studies[1] on the performance of individuals versus groups of various sizes in solving highly intellective problems. In the study footnoted here, small groups of three to five people consistently outperformed the best of an equivalent number of individuals and outperformed two person groups. It seems there’s something evolutionarily relevant about small groups.

 

Sports studies suggest that, in basketball plays for example, direct coordination happens between at most three people. People naturally gravitate towards groups of three to five when interacting. Including our incredibly talented Managing Director Jamie, who handles the business side of Variis, we are four. A really good size, and, given our heavily outsourced operational infrastructure, perfectly workable.

 

At Variis we wanted the smallest possible effective investment team, which we believe is three people. Keeping things tight has numerous benefits: reduced communication volume and complexity, less dilution of insight, less risk of bloat on position count, and greater degrees of freedom within the investment opportunity set.

 

Behavioural benefits of team decision making

Studies[2] consistently support the idea that groups engaged in collaborative decision-making perform better than even the most skilled individuals. This phenomenon is referred to as the collective benefit.

 

We know there are well documented behavioural biases that distort individual decision-making. Small groups undertaking collaborative decision-making can reduce these biases. Among the most famous of these biases is loss-aversion—people experience losses about twice as forcefully versus gains. All investors will have experienced aversion to taking a loss in an investment gone wrong. This feeling is especially pernicious as the failure often feels personal. Having collaborative Partners, slightly removed from the decision, and less biased, is, we find, extremely helpful for managing loss aversion.

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We built Variis fully cognisant of the scientific literature on team decision making. Some of the lessons we carry with us include: first, it’s critical to create a safe space for divergent opinions. We do this by sharing feedback in ways that show we empathise with and appreciate our Partner PMs as we work toward joint performance goals. And second, we share collective responsibility for strategy performance outcomes.

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Complementary skillsets on our team

The three of us—Leila, Eko and Rufus—are philosophically aligned yet highly diverse in terms of background and expertise. This diversity makes us a much stronger team.

 

Variis is an amalgam of our diverse experiences. While Leila started her career at Schroders, she spent over 15yrs working in EM long-short, and some of her learnings around the cadence of new idea productivity and proactive risk management are integral to Variis. Eko was at Generation for a decade and has substantial experience practicing sustainability investing in EM. She has led our ground-up integration of stakeholder investing (see prior letter on VSI). Rufus was the Chair of Genesis’ Portfolio Coordination Team, which was responsible for ensuring the team of about 8 PM worked effectively together. The learnings from Genesis’ experience have been critical in creating the ground rules for how we collaborate. These distinct and synergistic experiences make us stronger!

 

Thank you for your ongoing interest and support!

 

[1] Patrick R. Laughlin, “Groups Perform Better than the Best Individuals,” Journal of Personality and Social Psychology, Vol 90 No. 4 (2006): 644-651.

[2] Dev Mookherjee, “Does team size matter?” Metalogue. 19 March 2024. https://metalogue.co.uk/2024/03/19/does-team-size-matter/#:~:text=Research%20suggests%20that%20small%20to,strengths%20and%20more%20efficient%20communication.

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Leila, Eko, Rufus and Jamie

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Disclaimer

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FOR PROFESSIONAL INVESTORS AND ADVISORS ONLY

The contents of this document are communicated by, and the property of, Variis Partners LLP. The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Variis Partners LLP or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document. The information contained in this document is strictly confidential. The value of investments and any income generated may go down as well as up and is not guaranteed.