How a creative "pre-mortem" helps WCM spot future winners

First of all, philosophically, the notion of moat trajectory forces you to live in the future. We're asking ourselves the question: “Will this be a better business three years from now?”

WCM aims to invest in companies that are widening their competitive advantage. How do you assess a company’s future prospects?

We use tools like a pre-mortem process. Instead of asking what are the risks to a company today, we employ a creative exercise where we ask: “It's the year 2029, and the moat trajectory was significantly stronger than we expected, or the moat trajectory is now negative —what happened?”

I think this thought exercise forces you to be creative and truly live in the future.

How do you approach risk management?

We think there are many ways to define risk, but at WCM we really think about risk through the lens of what are your blind spots as it relates to the portfolio. We think there are two main blind spots that get investment managers in trouble.

The first one is knowing your universe. Oftentimes, an investment manager will have success doing one specific thing very well, and then they adopt too narrow a lens and miss that there is change elsewhere in their universe. And so really having a construction parameter that allows you to know your whole universe extremely well is something we take very seriously.

The second one is hidden correlations. Bottom-up managers often miss that 40% or 50% of your portfolio is tethered to interest rates. Or, speaking today, 40%-50% of your portfolio is tethered to a singular AI factor. And so really using portfolio construction through the lens of identifying and surfacing those hidden blind spots — whether it's universe and knowing your universe very well, but also the hidden correlations in the portfolio — is truly how we think about construction and risk management.

What are the core principles your research team lives by, and how do they differ from typical industry behaviours?

Our research team lives by three cultural principles: think different, get better, and make the team better. We think this would be differentiated in many, many industries, but in the investing industry, we think they are profoundly counter-positioned against industry norms.

By and large, investment managers do the opposite. There is lots of groupthink, and not too many people thinking differently. There is a high fixed mindset, with people trying to sound smart instead of trying to get better. And then there is lots of self-optimisation, with people promoting their own career path and standing as opposed to making the people around them better.

Our belief is that if you find great talent and unleash them with this cultural platform around thinking different, around getting better over time — because we all make mistakes — and around truly waking up every day trying to make the people around you better, that is where the magic happens.