A Step Backward Might Be a Good Thing

Abstract

The investment management profession has strayed from its primary mission; instead of being the best managers we can be, too many people and firms are focused on gathering more and more assets. We need to reinstate what was good about the past, including fundamental valuation and the search for positive tracking error. And marry those concepts and methods to what's good about today, including the high caliber of people coming into the business. Finally, we should use our skills and resources to give something back to the world.

Some aspects of what I have recently seen in our profession are discouraging. I have watched a growing focus on the profit side of our business—for example, in the increasing consolidation—and a waning focus on creative ways to make money for clients. Money is being managed by people whose passions are more about the business than the investment management process. The business has increasing short-term pressures. And people have begun to complain that our business just isn't as much fun as it used to be.

At such a point, what happens is that people in the business begin to reinvent themselves in newly formed boutiques and begin to spread the virtues of independence, small size, a focused organization, and equity participation for all the principals. This turning point may already have been reached.

This article looks at what was good about the Old Days and what is good about the New Days. In the Good Old Days, we focused on getting to know companies and trying to come to grips with their future prospects, on valuation of the companies, and on making sure that our analysis of future prospects was correct. I am distressed and somewhat depressed by the notion that the rest of the world would prefer to talk more about the trading characteristics of the stock certificates in the portfolio than about the underlying fundamentals of the companies in the portfolio. I have seen the rise of backward-looking measures such as beta and tracking error, the emergence of mediocrity as an objective for money managers, too much reliance on the computer's answer, and the definition of risk as deviation from the benchmark rather than what it is—the risk of losing money.

While I mourn the passing of some aspects of the Good Old Days, I also celebrate many of the changes in the profession. In the Good New Days, the market is global and the people and organizational culture of our organizations have become global. The quality of the young people who are attracted to this business is tremendously high. They understand modern portfolio theory, but they don't pray at its altar; they are passionate about analyzing companies and the impact people can have on companies. They love thinking about the future and are comfortable with uncertainty and risk. They automatically put things in a global perspective.

Finally, when I think of all this business has given us and all the fun we've had, I realize that we need to give something back—through the training and opportunities we give to others in the business and by allowing them to donate their time and energy to making the world a better place. There is more to life than managing portfolios, and we don't want to miss the chance to give something back.