As we don't know either the future or all the possible uses of our portfolios, we need to construct them to fulfill numerous functions. This is the main reason that we invented the TIMESPAN L Portfolios®. But even within this construction there are needs for some diversification as to asset types and strategies. Further, the portfolio managers selected should be diverse in terms of investment thought process. Otherwise one could have a portfolio of managers that have similar levels of aggressiveness based on reactions to current sentiments.
As a portfolio manager of separate accounts invested in mutual funds, I have become aware of having too much similarity of characteristics in clients' portfolios. Thus as essentially a student of financial and investment history, I look broadly as to what I can learn beyond a sole focus on performance. The following discussion of what I am looking at may be in whole, or more likely in parts, useful to our subscribers.
Searching For The Best CEOs
One can learn from sources in spite of the source's politics. The Washington Post wrote an intriguing summary of an article in the Harvard Business Review by a leadership consulting firm about selecting the most successful CEOs. I suspect that if we followed some of their findings they would apply quite well in the selection of funds' portfolio managers. Over a ten year study they concluded that the school of "higher learning" the candidate went to was not particularly useful in selecting the most successful portfolio managers. In the 1960s my brother and I came up with the idea that we should send a programmer to "The B School" and then we could predict the likely choices of the bulk of mutual fund managers’ actions. While we might well have been correct in terms of pinpointing financial advisory, investment banking, and institutional sales successes, we probably would have been off the mark in terms of successful portfolio managers. Similarly we probably would be wrong in filtering using the CFA® charter-holder designation, even though I have one.
The study found that 45% of the CEO candidates have had a career "blowup" and that of these 78% went on to become a successful CEO. This suggests that 35% of candidates which experienced a "blowup" were eventually successful. This finding is parallel to one of my approaches in fund selection. Luckily for selection purposes, fund performance histories are replete with down periods. (Possibly we may have entered into one after the March 1st highs.) I pay particular attention as to whether the manager stayed the course or changed the portfolio structure during the decline. (It may be too much to expect them to anticipate the declines. A few do, but many of these are late in getting in on the recovery.) What may be more career shaping is what happened to the portfolio manager within the political structure of his/her shop, which include leaving due to performance and/or economic reasons. I do not focus on the decline, but rather what, if anything, was learned and what actions were taken. Jeff Bezos who is the owner of the Washington Post as well as the CEO of Amazon made the following points in his shareholders' letter:
- Most decisions should probably be made with somewhere around 70% of the information you wish you had. In most cases, if you wait for 90%, you're probably slow.
- Being wrong isn't always so bad.
- If you're good at course correcting, being wrong may be less costly than you think; whereas being slow is going to be expensive.
My personal experience from the US Marines, the racetrack, and investing parallels Bezos’ thinking, except most of the time the best I can do is to gather about two-thirds of the desired information. This is acceptable because I am usually making an incremental decision in terms of a portfolio or selection of a manager.
Bottom line: I look for managers that make mistakes quickly and learn from most of them.
Can Managers Adopt to Change?
The Archstone Partnerships has decided to terminate after 27 years as a successful hedge fund investing in other hedge funds. As a Marine Officer, I am conscious of the mixed emotions of giving up a good command. I do not know Fred Schuman the leader of the fund and certainly don't know of his personal or firm concerns and thus have to take his announcement letter at face value. However some of the points he made have broader implications for other investment managers as follows:
1. In each decade since the 1950s there has been at least one "confiscatory" event. We have not had one for eight years.
2. The supposed riskless rate of return as captured by the 3-month T-Bill has dropped from 5% to virtually zero. (I would suggest that today there is more reason to question the rate of inflation and how it impacts the riskless rate.)
3. Rapid trading has overwhelmed the marketplace with 50-75% of a day's trading accomplished in one minute. (I am not sure that we are capturing all of the trading conducted.)
Perhaps the biggest changes in market structure have occurred in fixed income, commodities, and currencies which in sum total are profitable for market participants. If one isolates equity trading from underwriting and margin, my sense is that equity agency trading is not profitable. These structural changes plus consolidation and the fact that former service providers are increasingly competitors mean that today's successful portfolio management organizations have had to learn new skills that were not used a quarter of century ago.
Finding Workers Critical to Survival and Success
I must warn our subscribers that it is likely that many of my future weekly posts will have some focus on China. It is already the second largest economy in the world displacing Japan which is why many of our investment accounts have a distinct Asian orientation. Whether one invests actively in China or not, it is difficult to avoid indirectly investing in China. The IMF and others believe it is only a matter of time before China will be the largest economy in the world. Almost assuredly the path to its growth will not be smooth and there will be some reversals. Nevertheless I believe it would be imprudent not to be increasingly aware of China's impact on how we invest and lead our lives.
According to the China Daily News App, the Ministry of Public Security has announced a plan to upgrade permanent residents' ID cards. Some of the new features for the new card are as follows:
- The card contains a chip connecting with transportation, hotel, banks and insurance companies.
- The approval time is 50 working days.
- Less restrictions on type of work, company, period of residency.
- High-level talents as well as spouses and children automatically qualify.
Compare these attitudes with those of US, Japan, and European countries where achieving residency is much more difficult!
Northern New England
According to The Wall Street Journal the northern tier of the New England states can not find enough workers to fill the existing needs of businesses and services. (I would not be surprised to find similar situations in many other northern tier communities in the US away from the "oil patch," where shortages are present.) Awhile ago economists were concerned by the lack of labor mobility where there areas of large unemployment and others with substantial job vacancies.
From an investment vantage point we need to be conscious of the mix of jobs and the quality and quantity of labor. We could be on the cusp of significant wage inflation which could bring on even more robots. At the very same time the ticking time bomb of the absence of sufficient retirement capital can cause even more economic and securities markets structural changes.
The Wrong Focus on France
By the time we publish this edition of our weekly blog we will have the results of a substantial portion of the preliminary French Presidential election which is of interest but not of paramount importance to those that invest in France and Europe. The French President is by statute essentially "almost" a figurehead with little legislative power though with some key national security responsibilities. The "almost" is the critical key to the government. The elected President appoints the Premier who is the working head of the government. In the past the President was the leader of the largest number of elected members of the legislature and thus could produce coalitions that were able to enact the necessary laws and regulations that govern the country. This time could be very different with at least three of the candidates having limited numbers of likely members in the legislature. Thus, somewhat like the current dysfunctional US situation, the key attribute for a successful President will be the ability to get things done. The big difference this time is that the parties with most of the legislative votes will not be the same party as the next President.
As in the US I suspect that the private sector will be more advanced in its thinking and policies than those sitting in Paris’ halls of government. What is not clear to me tonight is the level of unity there is in the main private sector powers. Nevertheless, solid companies at reasonable prices may be good long-term investments in France.
In building long-term portfolios one should want a diversity of approaches as well as an awareness of secular trends and current sentiments.
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