With this being the week of Independence Day, I thought I would exhibit our firm’s independence of thought by sharing a few amazing stories.
You see, when an investment manager visits you, they are always careful to look their best because behavioral theory says we tend to trust those who look like and act like they are experts.
The manager also will virtually never tell you of problems or issues they have had in the past. Here are a few amazing stories.
No credit problems here
I remember, a few months after the Lehman moment, we included an interrogatory in our RFP’s for managers that basically asked for how they dealt with difficult credit situations.
After reading the usual pabulum about how great their credit process is, you were usually treated to a line that said, “We never had/sold out of (take your pick) Enron, Worldcom, Lehman, Washington Mutual, etc.” Well, somebody owned those problem credits, because OTTI was a huge issue back when they hit the proverbial fan. And, as relatively heavy borrowers, there was a good chance the manager did indeed own at least some of those bonds, as they made up a material part of bond indices.
However, a manager that tells you they ‘sold out’ of a problem credit, is probably loathe to tell you at what point in time that transaction occurred, and how it impacted their performance. Better to get out the sweeper and look for the nearest rug.
When a derivative is not a derivative
Or, how about the manager who knew more about the insurer’s policy than the insurer?
You see, the manager thought the policy allowed TBA securities (which are, in essence, forward commitments to buy (usually) agency mortgage backed securities). The company’s policy allowed RMBS, but did not mention TBA’s. The policy also specifically excluded derivatives of any kind.
Well, the company was kind enough to say that using a TBA security and then take delivery of the underlying security within 30 days was OK with them. But, that did not stop the manager from rolling TBA’s like a baker holding a rolling pin and mounds of dough (no pun intended).
Manager’s business model may not be in your interests
I still love the manager who tells their insurer client that they are dedicated to working with insurers….and that means a strong focus on core fixed income (investment grade bonds).
The manager even prices his services at very (sometimes too) competitive a rate. And, the insurer is overjoyed. Good investment management at a low fee.
It’s tough to beat that benefit/cost ratio…until the manager starts hounding the company to consider this or that different asset class, which, by the way puts big time fees in the manager’s pocket.
Of course those different asset classes may make sense, but they are never considered within a disciplined asset allocation analysis that considers all reasonable different asset classes….just the ones the manager likes to push.
Welcome to the business model of several managers with insurance specialization….and a business model you have to fully understand and, in many cases, avoid.
More Amazing Stories to come
As you might imagine, there are many more amazing stories. But, given the shortened holiday week, I wanted to be succinct in raising just a few of my favorites. You might even have a few yourself. Undoubtedly, these will be discussed in future blog entries.
So, as you enjoy the celebration of Independence on our nation’s 237th birthday, and as you marvel at your local fireworks display, you might keep in mind how important it is to think Independently.
Have a great Fourth of July!