Investment Leadership and Portfolio Management: The Path to Successful Stewardship for Investment Firms

Preface xi

Acknowledgments xvii

Chapter 1 Characteristics of Successful Asset Management Firms 1

You Can Take the Boy Out of the Culture, but You Can’t Take the Culture Out of the Boy 3

Size Matters, but Not in the Way Most People Believe 7

Governance: The Guardian of an Investment-Driven Firm 12

Fostering Collaborative Freedom: Everybody is a Peer 19

Integrity: An Unquestionable Characteristic of Success 23

Conclusion 25

Chapter 2 Building a Cathedral: A Framework for Turning the Mission into Collective Action 27

A Framework for Effective Leadership and Management 28

Establishing and Living Organizational Values 29

Creating Mission and/or Investment Philosophy Statements 31

Strategic Goals and Key Performance Indicators 33

Conclusion 37

Chapter 3 Building a Meritocracy: Understanding, Evaluating, and Rewarding Employee Contributions 39

Performance: A Deeper Dive 39

Horizon: The Fallacy of the Three-Year Track Record 40

Performance Analysis: Practically Speaking 45

Top-down and Bottom-up Approach to Determining Performance 48

Designing Your Rating System to Help Make the Difficult Decisions 51

What Does the Performance Score Really Mean? 53

Criticality: A Deeper Dive 53

Merit Zones: Putting It All Together 57

Communication of Performance and Criticality 59

Values and Compensation 64

Conclusion 67

Chapter 4 Investment Philosophy and Process: A Lofty Cathedral Needs a Deep Foundation 69

The Importance of Investment Philosophy and Process in Investment Organizations 69

Investment Philosophy: Core Beliefs 70

Investment Process: Control and Anarchy 73

Avoiding the Pitfalls of Behavioral Biases 78

Conclusion 83

Chapter 5 Investment Process in an Evolving World 85

Implementation Overview: The “How” of the Investment Process 86

Fundamental Valuation 88

Market Behavior and How It Challenges the Fundamental Investor 90

Team Behavior: Lessons for the CIO from Jelly Beans and Freud 118

Portfolio Design 127

Conclusion 129

Chapter 6 Communication for Superior Client Outcomes 131

The Problem: Human Nature 133

A Classic Tale 134

Case 1: Individual Investors, the Impact of Performance Chasing 137

Case 2: Are Institutional Investors the “Smart Money?” 137

The Reality of Investing in Equities 139

The Mathematics of Recovery 142

Dilemma: Investment Firm or Distribution Shop? 143

The Importance of Culture 145

Sales and Marketing in an Investment Firm 146

Conclusion 149

Appendix: Client Communication in Extreme Market Conditions 149

Chapter 7 Where are the Clients’ Yachts?: Reasonable Fee Structures 159

The “Gamma Trade” 161

Anatomy of a Blowup 167

Catch 22 168

Faults of Existing Fee Structures 170

Our Recommendation: High Integrity Fee Structures 178

Conclusion 186

Chapter 8 Final Thoughts 187

Characteristics of Great Asset Management Firms 188

It Starts with a Shared Mission and Values 188

True Meritocracy 189

Avoiding the Pitfalls 190

For Successful Client Outcomes: Communicate, Communicate, Communicate 192

It’s All about Incentives 193

Integrity 193

Notes 195

Bibliography 201

About the Authors 205

Index 207