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.