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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