Sunday, August 29, 2010

How to Send Your Investment Dollars Overseas

More and more money is leaving home. The flight is caused by unhappiness at what is happening in this country, if not outright fear as to the long term value of our hard earned capital. What many Americans fail to realize is that there is hardly a truly popular government any place. To some this desire to obtain capital escape is a new urge, but the truth is that wealthy individuals and families have been exporting their investment capital for centuries. The earliest investors to send their money across borders were the wealthy from small, often but not always, wealthy countries. The two leading countries that were slow to export an important part of their wealth were the Americans and the Japanese. In our case there was some foreign investment in the late 19th and early 20th centuries, (I believe that my grandfather’s brokerage firm had not only foreign customers, but some US investors investing overseas through his facilities). From the time I was a trainee in the vault of a New York bank counting foreign stock certificates that backed the American Depository Receipts some 50 years ago, I was interested in investing in foreign securities. While I have owned individual foreign stocks in the UK, Canada, Australia, Netherlands, and France, I found a sounder way to invest. With total bias, the better way to invest is through internationally-oriented mutual funds.


For those who are novice investors the best choices are global funds that mix at their discretion, US and foreign holdings. In truth, today most large capitalization funds almost anywhere in the world are global funds. In many cases at least half of the earnings growth driving their performance is generated by foreign-based affiliates or exports. But for those of us who believe that we have the right mix of investment managers, a dedicated international fund is the right tool. For those of us who are more demanding, a number of different international funds are needed.


Recently I was present when a large domestic investor was hearing the seductive call to invest overseas. Sitting through three presentations of separate account international managers, I realized that the analysis leading to their decision should have been similar as to what I do in selecting international funds for portfolios of largely domestic funds.


The first approach entails asking the question, “What does the international investment bring to the account?" The simplest desire, and the one that can not be assured, is better performance than the existing portfolio. To me the first step is how the new investment integrates with the existing investments. Some portfolios are essentially participators in the general economic conditions. Most of the satisfactory investments for this need are index huggers, or if you prefer, closet indexers. Some prefer actual index funds trading off potentially advantageous stock selection for lower fees. In truth, the portfolio manager of this product can be located anyplace where there is electricity for his/her index modeling computer.


A second approach is a country and/or sector allocator. In this case there is a willingness to move away from the central tendency of the index. As practiced by the activists, there may be a willingness to eliminate some countries or sectors. Others have an operating rule to underweight or overweight a country or a sector by 50%. For the most part these managers use publicly known trends. Their skills of mixing and matching can be practiced from any location where air travel can easily bring in foreign salesman or commentators.


The third approach is to have a global point of view. Often this is described in terms of growth (of earnings) or value (a discount from intrinsic value). Various studies show that from time to time either growth or value produce better results. As the investment game is now global, it is my point of view that growth or value leadership (or for that matter most sector leadership) follows a similar path in the domestic market as it does in various international markets. Therefore, we try to match the style inclinations of the international portfolio managers with those that dominate the domestic portfolio. As international investing is inherently more expensive, I reserve the domestic portfolios for minor style changes if I do not have the ability to meaningfully shift cash flows. In this third approach one is counting on the allocation skills of the portfolio manager. If one wants to participate in the leading edge and willing to be part of the “bleeding edge,” then the activist should be located in the flow of information. While today we can do a lot from a central location like my intergalactic world headquarters in Summit, New Jersey, there is a belief particularly by clients and some consultants, that closer to the action listening posts are better. (Notice that most of these are in cities with good restaurants.) There is some risk that the listeners are primarily getting their inputs from these restaurants, golf clubs, and in certain places, the American Clubs. The listeners may not have their ear really to the local ground. For example, in none of the recent manager presentations or six month reports did I hear anything about wide scale loss of faith in the European Union. On August 27, in my previously mentioned global world headquarters, I read that only 42% of Europeans say they trust the European Union, and this is down 6% in the last six months. In addition, “fewer than half of Europe’s citizens see their country’s membership in the EU as a positive thing….” as reported in EurActiv. I do not find this poll as a positive indicator unless I want to put on my contrarian hat. If I do this hat trick my investors should be warned.


The fourth approach and the one that I generally favor is one where individual stock selection is the critical talent of the portfolio manager. To my mind they have to know as much about the companies they invest in as the leaders in the various local communities. These managers should regularly attend important weddings and funerals; speak and understand the local dialects as well as be able to prepare local foods. In other words, they should have gone, or are, local. Having a string of offices around the world would help if they are offering investments beyond a single market. These should be primarily research offices not sales offices. There is a risk to this marriage with the locals similar to the risk of working with industry analysts. While from time to time they may advocate a sale, rarely will they advocate complete retreat and closing the office. Thus in this fourth approach there is a purchase bias which must be recognized.

We use all four approaches depending upon the needs of the account. Notice in no case did we focus on performance. My approach is that performance is at best an introduction to a manager and may well be poorly timed after a period of good performance.

As this blog is an instrument of a global community, I am curious whether you will share your thoughts on international fund and manager selection.

I hope next week to devote this blog to a view as to the direction of the domestic market that appears to be wallowing in fear and unhappiness. Any thoughts would be most welcome.

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Sunday, August 22, 2010

Can Information Overload Lead to Investment Underperformance?

As the regular readers of this blog learned, Ruth and I spent last weekend in the Berkshires attending concerts at Tanglewood. We were accompanied on our visit with two Blackberries, a laptop computer and an iPad. The psychologists will recognize that we are paranoid about missing information. In the weekend Wall Street Journal, Peggy Noonan assures me that “Information Overload Is Nothing New.” She refers to the recently published book, Hamlet's BlackBerry by William Powers, where he quotes letters from the famous ancient Roman senator Seneca. At the time of his writings many within Rome were anxiously awaiting letters from others, both within the imperial city as well as the rest of the global Roman Empire. In Seneca’s mind, too many Romans were becoming dependent on this source of information. Seneca wrote about “The danger of allowing others - not just friends and colleagues but the masses - to exert too much influence on one’s thinking.” He was asked what was important to avoid, his answer was “…a mass crowd.” “It is something to which you cannot entrust yourself without risk…” These thoughtful words from the past place an extra heavy burden on us with our portable communication appendages.


What drives me to always seek more information? I am fearful that hiding in plain sight is the single key that would open up the future, particularly the financial future. I should relax and remember much from my second great educational institution, the US Marine Corps. (The first was the New York race tracks.) In planning for operations against an enemy, I was introduced by the USMC to the concept of the essential elements of information. We were to focus on those elements of information that were needed for us to be successful; separating a kernel of corn from grains of sand, etc. In viewing the information, one needed to ascribe some qualitative judgments to each element of information. One needed to distinguish what was believable from what was credible. One of the key determinants was not what the enemy will be do, but what he could do. (I now recognize that this kind of thinking would have identified a potential “Black Swan” long before the Australian example showed up. Or the potential for more extreme “fat tails” rather than much more normal bell shaped curve distributions.)

Beyond analyzing the capabilities of the enemy forces, we were taught to look for the limitations on these capabilities. Often this meant estimating how much ammunition the enemy had on hand and how quickly he could be resupplied, and by what means. The next step was to guess as to what were the probabilities. On a chalk board every attack and every defense showed various units in some pre-determined order. In reality once a battle is commenced the balanced attack or defense becomes unbalanced, and now we begin the “real plan,” which the historians will credit the win or loss under the title of “Plan B or C or D.”

Markets and prices do not move in a continuous straight line and many imponderables surface to ruin formal investment programs. One of the key ingredients to a successful plan is an understanding of the personality of the leader on the opposite side. Robert E. Lee displayed this knowledge better than any other American general. In a market dominated by a relative small number of institutional investors (be they mutual funds, hedge funds, pension plans or foundations), and with individual investors following various pundits, it will be these few personalities that will translate the various inputs into quite different transactions.

In applying filters to the information overload, I use Seneca’s fear of thoughts from the masses. The way I do this is to make a judgment as to whether the current fears and expectations of “what everybody knows” is already incorporated into today’s prices. Every now and then the general prescription as to the future is correct, but not often. Further, when the public is correct, the movement in prices is often quite limited as most people have already acted upon the various fear and greed elements. On the basis of this type of analysis, I will make three short term bets. The first is that the US will not experience a “double dip” in the economy. Second, in the short run, emerging markets investment will not do better than those in the US. Third, some European investments will be surprisingly good in the short term.

Turning to the task of trying to find valuable insights from public source information that others do not see due to their information overload, I value highly the following two inputs. In our local paper, the Newark Star-Ledger, there was a Bloomberg story focusing on the number of jobs lost in New Jersey (21,200) and North Carolina (29,800) as thirteen states showed declines in payroll. Buried within the article was the statement that payrolls increased in 37 states. The leader, finally, was Michigan due to increased auto production. Nevertheless, in 74% of our states, more people are working. Another bullish indicator in the news was that Mort Zuckerman’s Boston Properties is making a large bet on Manhattan real estate, buying an empty office tower on Madison Avenue. Zuckerman also owns the New York Daily News. While not all of his investments have worked out, he has a good track record. For his investment on Madison to succeed not only must New York City thrive, but so must the bulk of the country and many others as well.

I guess I can not emotionally get out from under my information overload, but I can revert back to my Marine Corps training and seek only those essential elements of information to aid in my investments for others and myself.

What are your own essential elements of information?
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Sunday, August 15, 2010

Investment Selections Improve with Adjustments Before Eliminations

Too many mutual fund and separate account managers are selected by bracket rankings as used in basketball, World Cup football (“soccer” as we call it in America) and tennis, unlike golf and horse racing. In the first three sports, the winner and other high ranking finishers are derived from their last bracket victory without the recognition that some losing competitors are materially better than some of the winners of weaker brackets. In other sports analysis, sophisticated watchers adjust the results for many variables such as the conditions of the competitors and the conditions of the competition itself. Intense followers of sports are not the only ones to adjust their thinking and actions before their rooting begins.


This weekend Ruth and I had the pleasure of listening to the Boston Symphony Orchestra (BSO) and the Boston Pops, both in concert and in rehearsal. Each of the overlapping groups was made up of very talented professional musicians probably at the heights of their musical careers. Nevertheless their equally talented conductors clearly modified how each piece of classical music was played. In watching and listening to the maestros one could detect adjustments they wanted the performers to make in well known pieces that have been played, in some cases, for hundreds of years. I am not a music critic, but I recognized that some of the adjustments made during the performances were similar to the adjustments that I believe should be made when examining the performance records of various equally talented investment managers.

Looking at the parallel adjustments between the two very different art forms can be instructive. In each case the conductor knows that while past performances can be illustrative of the desired future performance, today’s conditions (known and unknown) are different.

Pieces of music and individual stocks, bonds, or commodities were originated to stand on their own. In the real world they are going to be used in conjunction with others, e.g. a Beethoven program, overtures to great operas, love themes through the ages, the development of the American musical, etc. An individual security may be only one component of a concentrated portfolio with a singular focus, or a broadly based portfolio to participate in a general market movement, or an asset allocation portfolio, etc.

A great concert is not just a collection of individual pieces of music, it should be one with a point of view. Similarly, a successful investment portfolio is not just a collection of currently highly performing positions. Thus, I look beyond the aggregate performance of a fund to see how many securities contributed meaningfully to the overall performance. To my mind, a fund with one or two spectacular winners, (particularly if they are initial public offerings or from one segment of the market) is very different than a diversified portfolio producing similar results.


While the great maestros can get better results from each of their players on any given day, there will be a range of skills delivered, just as a portfolio manager needs to recognize the different level of research that he/she is utilizing. Some fund managers rely on a deep culture of professional research analysts within their shops, such as the American Funds (Capital Group is their manager), T. Rowe Price, and Janus. They will give an investor a steady result different than a brilliant solo performer like Fairholme. Good orchestra leaders vary their programs and interpretations to a lesser degree. Portfolio managers are selected by the turnover of their audience (shareholders) which are often a demonstration of time horizons. CGM Focus has attracted short term investors by its volatile and sporadically good performance but has a very good long term record. Other funds with solid long term records who are able to buy bargains in down markets because they raised cash in high markets attract long term investors; good examples of these are the various Mutual Shares funds, the Dodge & Cox equity fund, Longleaf, plus some of the Ariel and Marsico funds.


Many (if not most) of the members of this blog community are serious professional investors. You manage money for yourselves and for your clients. What distinctions do you apply when looking at fund records? What eliminations do you make from the leader lists? What filters are you using and will you share any with us?


Before leaving the BSO and the Boston Pops there is another important contributor to their beautiful music that I should acknowledge. Over many years the BSO has built a very large community of contributors. As a contributor and investment advisor to numerous non-profits, I am envious of the size and composition of their program book’s advertisements and endorsements. As with portfolio management organizations, producing good results over time is rewarded with capital that promotes successes in future generations.
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Sunday, August 8, 2010

Are You Going to Make the Pledge?

Some 40 billionaires apparently have acquiesced to the suggestion from Warren Buffett and Bill Gates to give half of their wealth away to charity upon their death. Similar thoughts have been expressed by people who can be identified as ultra high net worth or high net worth individuals or families. Some of the same principles can be applied by those of more modest wealth.

According to newspaper accounts, a number of other billionaires have also pledged to put at least half of their wealth into their personal/family foundations, or to make substantial grants to other non-profit organizations. Roughly half of my time these days is spent on helping with the financial and investment activities for others, including managing the investments for our own relatively tiny family foundation.


One should be asking lots of questions before setting up one’s own foundation or making meaningful contributions to others. The following is a preliminary list of topics to be considered; there are no right or wrong answers.

1. Purpose

  • single
  • multiple
  • investment vehicle
  • training for family members in terms of grants/investing
  • control of assets
  • promote family cohesion

2. Longevity of foundation

  • time limited
  • dollar limited
  • tax constraint limited
  • dynastic
  • eternal

3. Governance

  • singular
  • internal
  • external
  • mixed
  • evolution

4. Compensation

  • family
  • external members
  • professional service providers

5. Mechanisms for review and flexibility

6. Grants/contributions

  • specific programs
  • endowments

    • present management-operational and/or investment
    • succession process

      • singular
      • committee
      • continuance
      • improvement
      • opportunity to step up


The above labels are cryptic and each could be answered in a book- length treatise. For this exercise to be truly useful however, one needs to enter into a dialogue. The reason that a dialogue is necessary is to identify investment structure with underlying principles. I would be pleased to be part of the dialogue, or to help explain this methodology to any members of our blog community.

Each branch of the decision tree outlined above is likely to cause an impact to the investment program, and all of this will change under the chemistry of the personalities involved.

Please share with me your thoughts on this or past blogs.
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Sunday, August 1, 2010

Policy vs. Execution

In our world of almost instant communication of large and small problems, the percentage of arm chair generals, pundits and head coaches relative to those in the trenches has reversed from past history. Today there are many commentators on almost any given topic facing the government, the economy, a publicly traded business or a portfolio. There is a belief that the result would be perfect if only the correct policies would be followed.

For those of us who have played football, been in the tactical military, operated a business, sat on a non-profit board, or managed a portfolio, we know that execution is what determines the result. There are a number of appropriate sayings that capture this reality:

  • “I prefer a bad plan well executed to a brilliant plan poorly executed.”
  • “We would have succeeded except for .......”
  • “I suspect that more touchdowns are scored in broken running plays.”
  • “In the military, you only get judged on Plan B (or Plan C, D or whatever)."


As we are currently in the political phase of our national news cycle, there is a lot of debate as to the correctness of certain policies. Because the highest order in politics is perversity, execution becomes the critical determinate of success. The current US administration is long on polemic policies, but has arranged for the future execution of those policies. For activities where there is current execution, the results are less than perfect. However, this malady is not restricted to the government sector.

As a manger of portfolios of mutual funds and hedge funds as well as a member of various non-profit investment and search committees, I am struck by those who are focused on policy and those who are focused on execution. I recognize I am forcing a black vs. white confrontation for demonstration purposes. Most people are desirous of having both good policy and good execution, but they begin their process of elimination from different starting points. Those who believe in policy usually use labels to encapsulate what they want, e.g. equities, fixed income, high quality, international, global, mortgages, hedge funds, private equity funds, etc. To me each of these labels is too encompassing. I find significantly different levels of large capital or income risk within each of these labels.


I prefer to first look at those that have done very well or very poorly, in other words, I look to the extremes. This bifocal approach is why Lipper Analytical Services was successful in convincing the press to show both the winners and the laggards in their periodic performance reports of mutual funds. This approach is not to bring condemnation to those at the bottom. My interest in looking at funds/managers at both extremes is to understand some common characteristics of the leading and lagging managers. Further, I am conscious that there is a great tendency of reversion to the mean, (the leaders move back to the middle or lower ranks and some of the laggards rise to the middle or higher). Often the leaders and/or the laggards do a much better job describing the current nature of the market than a policy label.


Each week we review the ten best and worst performing funds for periods of various lengths ending the week on a Thursday. Thus far, 2010 has been a difficult performance year for most managers as individual security selection seems to have trumped adherence to various investment objective labels or titles (policy). On a year to date basis through July 22nd, the ten leading equity funds included 2 Internet focused funds and 1 each of the following varieties: Colombian and Indonesian securities, a dedicated short-biased fund, a mobile telephone and transport fund and three broader based funds including a PIMCO Real Estate Real Return fund. On the other hand, seven out of the ten lagging funds were dedicated short funds, five of which used 2-3 times leverage and one was focused on real estate. As noted above, one of the leading funds also focused on real estate. Other laggards included funds focused on wind power, sugar as well as 20+ year Treasuries and the VIX index. Confused? I would suggest that most of the winners for the time period had superior selection skills in very narrow arenas, and most of the laggards were bettors against the markets, particularly against interest rates. During this period of time I would have been better off with those funds that had narrowly based selection skills than those who had an overall view on markets. Chalk one up for the executors over the policy types.

As a practical matter it is very difficult to find those managers that will execute well in the future. This investment risk can be managed by selecting a number of different funds that have demonstrated good selection skills in the past. This approach works well on the buying side of the equation. The problem is that many managers are normally reluctant to sell their winning positions, so they often ride their winners back down. The real skill of a professional manager of a portfolio of funds or a chief investment officer overseeing a portfolio of separately managed accounts is leaving somewhere near the top. Most of us find it difficult to leave a winner who has been very good to us. There are some managers who have a reasonable record in doing just that. A still smaller number have a history of repurchasing a past winner to play the cycle again.

Please share with me your experiences with this battle of Policy vs. Execution.

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