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Lessons from meeting of investment committee

Updated: May 3, 2013 12:14PM



Originally published: Jan. 6, 2002

Sometimes it’s easier to read the rules for successful stock market investing than it is to put them into action. That lesson was forcefully driven home to me at an investment-committee meeting of a large Chicago institution with more than $1 billion in assets. The committee includes some of the city’s best-known investment managers and financiers. Here are three lessons that crystallized from this week’s meeting:

Get ahead of the curve. Sometimes being far ahead seems risky to me, but they in their collective wisdom feel that being intelligently ahead of the pack actually diminishes the risk as long as it’s considered part of an overall portfolio strategy.

An example: The fund started investing in “alternative investments” such as “private equity” nearly a decade ago. Yes, they were higher-risk, illiquid investments requiring a relatively large up-front investment. Typically they were offered only to very wealthy individuals and large institutions. But past early investments are now maturing and throwing off tremendous returns--the reward for getting in ahead of the curve.

Current events: At this meeting, the subject of allocating a small portion of the fund for investments into “emerging markets” was raised--a discussion that occurred on a day when Argentina, arguably an emerging, or submerging market, faced imminent devaluation of its currency and chaos. Weren’t we getting a bit too far ahead?

Answer: It’s not at all too early to start investigating the possibilities. When economic growth returns, these countries such as China will have huge consumer demand.

Stick to a strict asset-allocation formula. It’s hard to take money off the table when you’re winning. But this group had the discipline to do so, and reaped the benefits of “rebalancing.”

Example: One money manager was given a starting investment of $4.9 million, to which another $74.3 million was subsequently added. The investment today is worth: $33.3 million, but that’s after withdrawing $183.1 million, as the portfolio was rebalanced along the way. The overall gain totaled $137.2 million!

Current events: In the last year, this tremendously successful manager had substantial losses because his “growth” style of investing went out of favor. He came in to give a presentation, which triggered the next lesson:

Don’t play last year’s game. Just because it worked last time, doesn’t mean it will work this time.

Example: The growth-portfolio manager who performed so well in the ‘90s gave a compelling presentation that his style was about to come back into favor, and that value stocks were about to go out of favor. The world was not going to end, and growth would resume, including in select technology areas.

Current events: He left the room. Two of these seasoned investment pros frowned. “Let’s not give them more money,” said one. “The profits were made on ‘momentum investing,’ buying stocks that were moving higher. That game is over. As we move back to lower, more normal returns in the next bull market, it will be the stock-picker’s turn. To succeed at that game, you need lots of analysts--and low turnover. Just the opposite of what worked for this manager in the last bull market.” One more lesson learned.

Fees and costs matter more now. In a booming market with double-digit returns, you don’t mind paying commissions and fees. But if we do have several years of lower market returns, high costs can kill you.

Example: The investment fund has a value manager who actually managed to beat a popular index by losing less than the index lost. Relatively speaking, this manager was a winner. But over five years the performance wasn’t so great.

Current events: “It’s the costs,” said one astute committee member, assessing the long-term track record of the manager. “In a low- return environment, the fees and costs will kill you. In this plan account, we care about net returns after fees.”

Conclusion: Dump the fund manager--even though the performance was average--and just use a low-cost index approach. Said the pro: “Let’s pay fees only where money managers add real benefits, not the case in the large-company, value universe.”

These are the lessons of the investment pros. Watching them in action, I’ve learned that it’s a lot easier to understand the rules than it is to practice what you preach. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of McDonald’s Corp. and Pennzoil-Quaker State Co.



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