Separating: Present, Renewals, & Fulfilment - Weekly Blog # 879

 

 

 

Mike Lipper’s Monday Morning Musings

 

Separating: Present, Renewals, & Fulfilment

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

 First Priority

Determining the motivation of the client and the account’s heirs is key to understanding the performance of most investment accounts. When asking the real investment account decision-maker about the driving motivation, it is often singular even though multiple other motivations are listed. (It often takes many discussions to reach the effective truth. Over time and changing situations the driving motivations may change.)

 

With most individuals, critical decisions are based on selected discussions with highly respected individuals, which may change over time due to changing circumstances. Most often these individual decision advisers are not revealed to the “hired hands” of the portfolio manager. All too often the unofficial managers express their opinions based on their own experience, which may have little relevance to the long-term needs of the account. These accounts are effectively managed by people known and unknown to the professional manager. Thus, the crucial job for the professional is to communicate effectively with those having meaningful influence on the account. Not an easy job.

 

The Second Motivation

The owner of the account should understand that there is a second motivation operating in practically all situations. The prime motivation of the investment manager is to continue the relationship with the present controller of the account, which includes the periodic renewal of the relationship. The relationship rests primarily on the communication skills of the manager in reaching the expected satisfaction level. This is a two-part job, where the first task is setting and updating expectations. The second task is delivering the expected return and communicating the proper expectation. This is again a two-fold job, with the first task satisfying the adjusted needs of the account in absolute return terms. The next part is where many managers fall down, the artform of selecting appropriate comparisons. This is where my biases enter. I do not believe a managed account should be compared to a list of securities selected by a manager. It should instead be compared to a fund portfolio with real expenses and diversification requirements, similar to the account itself.

 

The Most Important Motivation

Most of the money in the United States is managed directly or indirectly for “retirement needs”, which has lengthened over time. “Retirement” can include the institutional needs of academic, medical, and cultural institutions. What makes these accounts challenging is the receipt of money near term to meet future needs, which may not be well-defined in the current period.

 

Currently, the biggest hurdle in managing long-term money is the new economic/financial situation, which is different from the recent past. Most of the time change moves relatively slowly, which allows the participants time to adjust their actions to the pace of change. However, there are some brief periods of even more rapid change where it is difficult to catch up and adjust to the radical changes. I believe we have entered such a period and expect to have more difficulty predicting the future. For a period, we will likely be out of step with the fundamental changes likely to occur.

 

What is Changing?

The following elements of change surfaced last week.

• Weekly S&P sector performance: S&P Finance +2.80% vs -4.01% for S&P Tech.
• Goldman Sachs will soon cut 3-5% of its Vice Presidents.
• Schroders will lay off 200 employees to refocus and improve profit margins. They will also cut their Executive Committee by half, which is 44% family owned.
• There are $3 trillion ageing and unsold private equity deals. (Retail investors are taking risks in Private Equity that exceed public investing protections.)
• The US has not seen so much restructuring in the Federal Government, Corporations, Energy, and Retail since the Depression.
• The AAII weekly sample survey’s 6-month bullish prediction is now 19.3% vs 57.3%. (The lowest I have seen, which is often wrong at turning points)
• Global financial communities are developing new instruments that can be leveraged.
• With copper and coffee commodity prices going up, I am not surprised the Fed is holding off on lowering interest rates.
• There is probably more to the reluctance in naming a bank supervisor than we know.

 

We know that history does not repeat (exactly), but it does rhyme. There is an incomplete comparison one could make with the 1930s, but I hope it isn’t so.

 

 

 

Did you miss my blog last week? Click here to read.

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