Introduction
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
China
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.
Conclusion
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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A. Michael Lipper, CFA
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