Dare to disagree – equities manager warns of the dangers of groupthink

Managers need to avoid ‘Groupthink’: Hyperion.

Fear of expressing views at odds with the group could be causing some fund managers to ignore information which could lead to better investment decisions.

This is the view of Joel Gray, Portfolio Manager at Hyperion Asset Management, who says that fund managers need to be vigilant about avoiding the phenomenon known as groupthink.

We all know the story. When a stock is surging, investors flock to it, expecting essentially ever more unrealistic gains, seeking out information which backs up what they already believe, and ignoring information which is contrary to their view.

Mr Gray says that this is groupthink in action. “Groupthink tends to happen in closely integrated teams and is marked by a consensus of opinion without critical reasoning or evaluation of alternatives,” he explained.

While no one would deny that a collaborative team-based approach to investment decisions has much to recommend it, and is generally thought to be the backbone of a robust investment process, by the same token, a lack of conflict is rarely the sign of a well-functioning decision process.

“Too much consensus, or groupthink, can really compromise the quality of investment decisions,” Mr Gray said. “If analysis of company information is not complete, fund managers don’t question decisions, or are unwittingly biased in the way they process information, then opportunities can be missed,” he explained.

To contend with the biases prevalent in group decision making, Mr Gray, recommends having processes in place to encourage investment team members to play a devil’s advocate role.

“At Hyperion we have certain processes in place that promote preparation and careful thought on investment issues. For instance, investment team members are expected to express an opinion during formal team meetings, and actively encouraged to put forward a view contrary to the team consensus.”

According to Mr Gray, there are many benefits to contrary opinions within a team. “Not only are potentially entrenched views questioned, but questioning also improves the team’s understanding of a company’s overall competitive advantage and/or its growth prospects,” he said.

Mr Gray went on to explain that for any stock to be purchased and to remain in Hyperion’s award-winning funds, each of the four most senior investment team members has to sign-off on each individual portfolio holding.

“As a safeguard against groupthink, we require only one investment team member to challenge and veto a stock for it to be excluded. This is just another way of ensuring that each individual member has researched every company and comes up with their own independent view on the company’s investment worthiness.

Hyperion is a high conviction manager, which means we believe in a process that adheres to rigorous due diligence and provides the checks and balances required to come to well researched, considered decisions. And even more importantly, the process needs to be repeatable.”

Mr Gray concluded by saying that effective decision making requires a balance between diversity and convergence – generating ideas, but reaching agreement on particular decisions that need to be made.

“A clear set of responsibilities for investment team members and a defined and documented decision making process goes a long way in extracting the best investment decisions within a close-knit, high pressure team environment,” he said.