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Fund manager uses FBI tactics to vet CEOs, investment portfolios

Fund manager Rhett Kessler is using lessons from a FBI course to interrogate CEOs, catch them in lies and exaggerations to decide on holding their company shares.

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Sydney: Rhett Kessler took a course from former FBI agents on how to interrogate subjects, and he’s bringing the “powerful” skills he learned to the world of investing.

Kessler, senior fund manager of the A$1.1 billion ($727 million) Pengana Australian Equities Fund, uses the Federal Bureau of Investigation’s interview techniques to get under the skin of chief executive officers, seeking to catch them in lies, exaggerations and deflections of blame for their actions. By gauging if they’re trustworthy and competent, he decides whether to hold their companies’ shares.

“We are like the FBI,” Kessler said in an interview at his office in Sydney. “We have a dossier on each management team.”

The approach has helped deliver steady returns for the investment fund since its inception in 2008, with average net performance of more than 10% a year. In the era of computer-driven strategies, it’s one aspect of investing where human judgment is still paramount.

Kessler, 54, likes to ask questions to which he already knows the answer. This tells him if a CEO has a tendency to exaggerate successes or play down failures.

“For every 10 questions we are going to ask, we all know the answers to three or four of them,” he said. “Some of them will be to show the person in a good light. Some of them will be to show the person in a bad light. And we know the answers.”

He sometimes asks what he calls the “A, B, C, D question.” In this, the fund manager has deliberately missed the point, leaving out one piece of information that’s crucial to understanding the situation — something that reflects badly on the executive. He’s checking if the interviewee will point it out.

“That’s why we call it the A, B, C, D question,” Kessler said. “Are they a volunteer of bad information or not?”


CEOs can be counted on to embellish the truth, according to Kessler. Chief financial officers do so less often but tend to tell bigger lies.

“All CEOs exaggerate,” he said. “It’s only when it’s five times that we start to get worried. Most CFOs don’t, but when they do lie they are whoppers.”

While the techniques will always work for questions where the fund manager knows the answer, they’re less foolproof when he’s genuinely seeking information, he said.

“We still get caught out,” he said. “I wish I could say that you always knew when a person is lying.” He estimates the fund has a 90% success rate in determining “when there is something out of kilter in questions where we don’t know the answer.”

Of course, there’s more to Pengana’s investment technique than just trying to catch CEOs in lies. Kessler says the fund is different because it seeks to get to the essence of a company’s business, rather than just asking rote questions about its forecasts for capital expenditure or future earnings. And it has a philosophy of preserving capital that saw it put 50% of assets into cash during the financial crisis of 2008.

The Pengana Australian Equities Fund has gained 10.4% per year, net of fees, since July 2008, topping a 6.7% advance in the Australian Stock Exchange All Ordinaries Index, according to the fund’s most recent report on its website. Kessler says the rush into passive investing and quantitative strategies in recent years will “create a better environment for stock pickers as the herd gets bigger.”

Top Holdings

Kessler’s fund counts among its top holdings stocks such as Aristocrat Leisure Ltd., which sells gaming machines to casinos and clubs, and CSL Ltd., a maker of pharmaceutical and diagnostic products derived from human plasma. Aristocrat is up 45% this year, while CSL has risen 35%.

Currently, the fund has about 15% of assets in cash, as it’s wary of deteriorating economic data in Australia and high stock valuations, said Kessler, who runs the fund alongside Anton du Preez.

Top 10 stocks (alphabetical order)
Aristocrat Leisure
Credit Corp
Medibank Private
Viva Energy Group
Viva Energy REIT

Kessler, who took the course from former FBI agents more than 13 years ago, says the techniques are “essential” in his work but he’s careful not to use them in his personal life. People find them “quite threatening,” he said.

“My kids have given up trying to lie to me, mostly,” he said. “I make a conscious choice not to use it in a social setting because it’s very, very powerful.” – Bloomberg 

Also read: This is what the world’s CEOs think about the global outlook


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