(Bloomberg Opinion) -- Hot off the presses, an analysis by Norway’s sovereign wealth fund of its experience hiring external portfolio managers over the past two decades or so is a useful guide for anyone wanting to manage money for the much-revered institution. So here are some tips, including — spoiler alert — the astonishing revelation that past performance counts for nothing in the selection process.

The fund, the world’s biggest with assets of about $960 billion, says it favors portfolio managers who are “curious, humble and willing to change their minds.” It sees the absence of those character traits as a recipe for investing disaster:

Managers who cannot admit mistakes or who blame other people for their mistakes lack the personal quality of being humble and are likely to be overconfident in their own abilities, thereby increasing the likelihood of investing in companies that lose substantial value.

Moreover, it prefers its managers to be active, and equates increased trading activity with better returns. Among its emerging markets and small cap portfolios, the 40 that had annualized turnover of their holdings of more than 100% beat their benchmarks by 4.3%, compared with just 1.2% from the 37 portfolios that switched less than a quarter of their investments.

As you’d imagine, the Norwegians are quite picky about who they allocate their capital to, with only a select few passing muster. In 2018, the fund had 223 meetings with possible new funds, eventually handing money to just 13 of them. It likes to evaluate its prospective hires up close and personal. Its thinking seems to reflect the old adage “everything is seating charts,” as my colleague Matt Levine has argued several times.

We prefer to meet managers in the “engine room,” which basically means meeting them at the desk where their work is done. By doing this, we also get a better view of how portfolio managers and analysts are seated and how this may impact daily interaction.

So should you present your prospective Norwegian customers with messy desks or a pristine office? There’s a good chance the former would be a better indicator that you and your firm have the attributes Norway’s sovereign wealth fund is looking for. That’s because disorderly environments “seem to inspire breaking free of tradition, which can produce fresh insights,” according to a 2013 study published by the Psychological Science journal, whereas orderly ones “encourage convention and playing it safe.”

And what becomes very clear in the report is that Norway’s fund doesn’t want its external managers to play safe. “We look for managers where both their strategic thinking and their historical portfolio tell the story of a manager who does not make portfolio changes in line with the market and at the same time as other market players,” it says. For example, its external emerging market funds own just 27% of the stocks in their respective benchmarks; for small cap managers, the figure is just 19%.  

The real shocker comes about two-thirds of the way through the report, which runs to more than 150 pages. The fund says it pays absolutely no attention to the previous returns fund managers have delivered when considering whether to hire them:

We do not see historical performance as valuable information when selecting managers and spend no time analyzing databases of historical returns. We hire managers because we believe their research and decision-making will create good performance in the future, not because of the performance they have generated in the past.

The fund reckons it’s parted with an average of 11 outside portfolio managers per year since 1998. More than a third of those were due to changes in asset allocation by the fund itself as it has shifted between geographical, sectoral and environmental mandates over the years, before arriving at its current strategy of limiting external funds to overseeing its emerging markets and small company investments. An additional 27% were released due to changes at the outside firm; one mandate lasted just two weeks because a manager quit the firm they’d just handed money to. 

However, about a quarter were sacked after Norway’s sovereign wealth fund lost confidence in the manager — and when the end comes because of a loss of faith, the exit is swift. “Termination is performed with same-day notice,” the report notes, with the fund’s own managers taking responsibility for unwinding the exiting portfolio’s positions to avoid any possibility of malfeasance.

It’s an exclusive club, with less than 4% of the fund’s assets controlled by external managers at the end of last year, as noted by my Bloomberg News colleague Mikael Holter. But for those who gain admittance and are successful, the relationship can be long lived.

One of the Norwegian fund’s external managers has been running its money for 11 years and has beaten the relevant benchmark by an annualized 21% during that time. Unfortunately for the manager, a staggering outperformance of 70% between November 2008 and August 2009 prompted the fund to impose a cap on the performance fees across all of its mandates — meaning those stellar returns have mostly enriched the fund. The price of humility, perhaps?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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