September
5, 2003, 7:00 a.m.
One from the Wine Cellar
Acquire a taste for good, consistent portfolio managers.
uring the
summers in South Carolina, where the temperature outside hovers in the
mid-90s, I like to sit back and ponder life in my small, cool wine cellar.
While among my old friends (some go back to 1989), I have often reflected
on rewarding experiences I have had while in the investment business.
But recently I recalled a story that matched just right with my wines.
The
time was late 1984, during the Reagan bull market. The Federal Reserve had
raised the fed funds rate from 8 to 12 percent in a few short months (really!).
As a result, growth stocks fell in price and institutional investors took
a hard look at the performance of their growth managers.
After a period of poor
relative performance, institutional investors tend to fire poor-performing
managers in order to hire managers that have been successful over the short-term.
(Sounds a bit like the little guy chasing performance.) Even more disheartening
is when a growth manager shifts toward value stocks in order to match the
latest trend. But it has happened in the past and it still happens today.
(Have you seen the latest advertisements urging investment in bonds?)
During the mid-1980s,
my role as an investment manager of an investment-management firm was to
provide support for analysts and portfolio managers who were struggling
in a difficult environment. As circumstances would have it, I was asked
to participate in a client meeting regarding the recent portfolio performance
of none other than MCI.
The presentation took
place at MCI's headquarters in Washington, D.C. The portfolio manager for
this account and I were escorted into a dimly lit room containing a round
table suitable for King Arthur and about twenty executives and board members
from MCI. The spokesman for MCI — I think he was the chief financial
officer — took charge of the meeting:
"You are the guys from
'XYZ' manager, right?"
"Yes," we responded.
"You are the guys who
manage growth stocks, right?"
"Yes," we again responded.
"Do you realize that
you are, by far, our worst performing manager?"
"No," we responded.
(By this time I began to feel my knees knocking under the table.)
"After this lousy performance,
are you guys going to continue with this strategy?"
"Yes," we responded.
After a seemingly endless
pause, the MCI financial officer said the following: "Well guys, we happen
to believe in you and your firm and because we are convinced you will maintain
your strategy and won't deviate from it, we are going to double the amount
of money we have invested with you."
"Thank you," we responded.
(Whew! That's why money
managers don't last.)
In 1989, almost five
years after we made that presentation, I went back to see what happened
to the MCI portfolio. Since growth stocks had good performance, I was expecting
to see good results. (Our firm had remained committed to growth-stock investing.)
However, I discovered that the MCI account had risen by a compound annual
rate of 20 percent — the best performing institutional equity portfolio
at the firm.
So, in an environment
that should have spelled doom for another growth-stock manager, the client's
conviction to stay with our firm produced a rate of return of more than
double the long-term return of the stock market.
Investing — I
was reminded during my wine-cellar escape — is a lot like fine wine.
As I looked over my inventory, it became obvious that I have held and cared
for the wines that have long provided the best results in my glass. Like
a steady-performing chardonnay, pinot, or blend (like my prized 1995 Opus
One), if you have a good portfolio manager with a consistent strategy, be
sure to keep him around.
—
Tom
Nugent is Executive Vice President & Chief Investment Officer of PlanMember
Advisors, Inc. and an investment consultant for Wealth Management
Services of South Carolina.
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uring the
summers in South Carolina, where the temperature outside hovers in the
mid-90s, I like to sit back and ponder life in my small, cool wine cellar.
While among my old friends (some go back to 1989), I have often reflected
on rewarding experiences I have had while in the investment business.
But recently I recalled a story that matched just right with my wines.
