I guess it is time to revisit PIMCO and Bill Gross and Mohamed El-Erian, since the headlines have started up again. When last we visited the soap opera, I had a simple question: “What’s the most important job of a chief investment officer?”
This time, other questions. Given the thousands of due diligence questionnaires (DDQs) filled out by consultants, institutional investors, and investment advisors about PIMCO, how many of them identified the issues in advance?
Who questioned the firm’s process?
Who saw past the fame of the key people and identified the cultural rifts?
Truly, I’m interested in knowing, because I don’t think there are many DDQs extant among those thousands that give a hint of what was happening at PIMCO.
We see performance and infer process. We recognize accomplishment and grade the “people” questions in that light.
"I’ve never seen Bill and PIMCO scrutinized like this before," Eric Jacobson of Morningstar was quoted as saying in a Reuters story.
The purpose of those DDQs and the whole of due diligence is to get at the issues in advance. A very tough standard. Who met it in this case?
This morning I tweeted this image:
It came from Pioneer Investments. You can see the footnotes to the chart on its website; I distributed the image today as an example of the superficial simplicity with which retail alternatives are being marketed.
The vehicles are springing up left and right and the money is pouring in. How many of the buyers could pass an investment challenge (like this one) as to how the alternatives work or what might cause them not to work in the future?
Then, this afternoon, MFWire came out with a story that Pioneer is sending its sixty (count ‘em, sixty) wholesalers to “alts boot camp.”
That’s a good thing, in that more education on the topic is needed, although I fear that the education might be primarily focused on the how-to-sell-them points rather than the nuances and traps of this very complex set of investment vehicles that have been packaged together in a one-word meme.
The fever is getting hotter by the day and the industry is ramping up its marketing efforts ever more. Remind me, historically has that been a good time to buy what’s being sold?
LeBron James made news by saying that by the time he’s done he’ll be on the Mount Rushmore of pro basketball. (He currently picks Michael Jordon, Magic Johnson, Larry Bird, and Oscar Robertson as being on the mountain; others have their own lists.)
It reminded me of a lunch I had with Byron Wien in the mid-1990s in a Morgan Stanley private dining room. I worked for a big client of the firm and was putting together a hedge fund, so I was going around talking to hedge fund managers and others, like Wien, who knew the business well.
What I remember most was his discussion of the Mount Rushmore of hedge fund managers. At that time, there were three consensus choices: George Soros, Julian Robertson, and Michael Steinhardt. What motivated many in the business, according to Wien, was not just the wealth that came from a successful fund but the chance to be in that fourth spot.
Almost twenty years later, it’s interesting to look back at the waves of managers who have been considered candidates. At the time of the lunch, Meriwether was a popular pick to make it, but then LTCM fell apart. Druckenmiller, Griffin, Lampert, and Simons gained favor at various times. There are those like Paulson, who many think is a one-hit wonder, and Cohen, who probably will appear in the record books with an asterisk — plus lots of other names I could mention as being in the competition.
Of the original three, Robertson and Steinhardt backed away (no shame in that), but Soros kept on going. As with sports, comparing investors from different eras is very difficult. The numbers are bigger now in every way, so dollar comparisons aren’t valid. And, despite many tumultuous episodes, we haven’t had a sustained unfavorable investing environment in decades. It might make a difference when we do.
We’ll see who stands the test of time, but if you were going to carve the mountain today, 65 years in, who would be on it?
Last week I did a chart on pix (one of the three research puzzle sites) which looked at the performance of three different index weighting schemes.
Two of them, the S&P 500 (market-weighted) and the S&P 500 Equal Weighted are obviously closely related, with the same securities, just weighted differently. The third index shown, the FTSE RAFI 1000, draws from a larger group of companies and is fundamental weighted. (The ETFs for the indexes are SPY, RSP, and PRF, respectively.)
I received a good question from a well-known financial journalist regarding the chart: When did the RAFI index “go live”? The answer: Late November, 2005. That meant that much of the chart represented backtested returns rather than live returns, which was precisely the point of the question.
For the sake of completeness, it should be noted that the S&P 500 Equal Weighted also was not in existence throughout the period of the chart. It went live in January 2003. As mentioned earlier, it shares the same securities as the S&P 500, plus the weighting scheme is fixed, so the backtesting issue doesn’t come into play. Nevertheless, like the RAFI, it was not around in 1990 or for many years thereafter.
This is an issue that gets lost in a lot of analysis and, yes, I lost it in this case. That’s why it’s good to have sharp readers. Here’s the chart with the “live” dates marked in the lower panel.
Q: I bought CMGI stock at $60 last spring with a target of $90 by year end. Now I just want to get my money back. What do you think?
T.H., Carver, Minn.
That question was posed in the October 15, 2000 Wall Street Journal Sunday supplement of my local paper.
It was accompanied by a chart like the one here, the narrowness of the chart emphasizing the descent of the fall.
The answer (by Steve Frank of the WSJ) covered a lot of the ground that defined the period. The company, which had been buying dot-com firms left and right, was “shifting its focus away from venture-capital investing and toward building its role as an operating company.”
The company “reaffirmed” that it had enough cash to last a couple of years and the CEO said he was buying a large slug of shares in the open market. But Henry Blodget of Merrill Lynch said the stock wouldn’t work unless cash flow turned positive. It didn’t — and the stock didn’t work; it kept going down and down.
We have all been in situations where we just want to get our money back, so I’m not picking on T.H., although it does say something about the times that his expectation going in was that he’d make 50% in nine months or so.
Recent editions of pix have looked at target prices (in this case, in reference to Facebook) and the wild month of February 2000. Whether the minor bump in the road of the past few weeks turns into a Minnesota-sized pothole depends on the nature of the expectations of the crowd going in and its reaction to changing circumstances. That’s something we never know for sure.
There has been a lot happening at PIMCO. Although Mohamed El-Erian is still listed on the website as co-chief investment officer, he resigned eight days ago. Now there are six new deputy chief investment officers.
"Each individual deputy CIO will have some empowerment that probably was lacking to some extent in the past, so that will improve," Bill Gross was quoted as saying in response to the new roles.
In considering PIMCO, are you getting a man or an organization? That is an important question. I was shocked this weekend when the Twitter avatar for the firm was a picture of Bill Gross, so I tweeted, “see the @pimco avatar ~ no pretense about an organization; it’s a person.” It has since been changed back to the corporate logo.
The firm says that it has 738 investment professionals; I believe that more than a hundred are called portfolio managers. How much empowerment do they have? Another question worth asking.
But let’s jump to a broader question. What’s the most important job of a chief investment officer?
My answer: Creating and sustaining an organization that can make good investment decisions.
Yet that is far down the list of duties at the majority of firms, if it’s mentioned at all, and clients don’t pay attention — for the most part, they just want to know what the big guy thinks about the market.
For now, the topic has changed.
A recent Jason Zweig piece, “New Warnings from an Investment Pioneer,” profiles Dean LeBaron, the legendary head of Batterymarch. “As unorthodox as ever,” LeBaron is leaning against the prevailing sentiments of the day and sounding the alarm. Whether you think he’s spot on, early, or just plain wrong, the article is worth reading.
By chance, a day or two before Zweig’s posting, I had come across a “Xeroxed” copy of a short article that LeBaron had written for the July 3, 1989 issue of Fortune, in which he talked about what institutional investors could do to improve performance.
The bullet points:
"Investments must have the potential for embarrassment." Many decisions favor avoiding embarrassment instead of taking a balanced look at risk and reward.
"Illiquidity is an opportunity for greater return." Boy, did this presage the move by institutions into "the endowment model."
"Investment horizons shouldn’t be the same as everybody else’s." The same point is made in Zweig’s article. Note, however, that the three-to-five year time horizon for institutions in 1989 has now collapsed to one-to-three years "at most." Yup.
"Dissent is good." It can’t be said enough. (In fact, I said it yesterday as part of a speech I gave on investment committees.)
LeBaron liked to “be first” and avoided following the herd like most investors do. It is hard to do, but the payoffs can be great, as LeBaron demonstrated time and again.
The phrase “the triumph of hope over experience” is credited to Samuel Johnson. I thought of it recently when I saw a pie chart in InvestmentNews from a survey of financial advisors who were asked this question:
"In 2014, which investment strategy is more likely to produce the highest net returns?"
The pie was filled in with one-quarter in one color and the rest in another. 25.2% of the respondents said a “passive” strategy would win. The others said “active.”
As far as I know, the crowd may be right. Perhaps the conditions warrant such a bet this year, even though the body of historical evidence wouldn’t support such an outcome net of fees.
It would be enlightening to see the results to this question over time. Perhaps advisors flip back and forth in predicting whether active or passive will perform better year to year, but I doubt it. For the most part, advisors are in the business of selling their ability to find active return in excess of benchmarks. (A cynic might say that 74.8% would be a good estimate of the percentage that try to do so.)
Whether the time is right for active management versus passive management is a worthwhile question, but you shouldn’t go looking for perspective from those who have a rooting interest in the answer. Hope plays too big a role in their calculations.