Barron's had a couple of noteworthy articles this weekend. One was a profile/interview with Bob Olstein. He had one comment that makes a great point about specialty managers.
"We're going to have to look for what I call the ugly ducklings of the world -- the companies where there are either misperceptions, temporary problems or some negative psychology surrounding an industry -- to grind out 9% or 10% returns" says Olstein. "They're going to be the stars going forward, the 9% or 10% managers."
Bob is a deep value manager, he has a well honed process and he is very good at what he does. I take the above quote to mean that he sees a chance that his style may lag for a while as (the article points this out) it did in 2005.
I am not really a believer in sticking to one investing discipline for all time. Long time readers may have developed an opinion about my style that may not be right. The things I have chosen to overweight are things I think will lead. The next time tech and growth lead I will rotate to overweight those areas. I may or may not time it well but knowing that tech will one day lead means that one day I will overweight it.
If you manage your own portfolio, hire a manger or do some sort of combo of both you need to recognize that a value-only manager will lag at times, a foreign-only manager will lag some times and so on.
The other interesting article was the cover story about separate accounts. I was struck by something as I read through. A lot of separate accounts really aren't all that separate. This does not have to be bad but a firm with 1000 accounts might have a tough time with real customization.
Here is a practical example of what I mean. Some clients own Armor Holdings (AH). I first started buying it in late 2004. It is an industrial stock in the defense sector with a small market cap. The name adds volatility to client portfolios. That volatility is not ideal for everyone so not everyone owns it.
It is easy to weed out the clients that should not own the stock. A big firm will have a tougher time, due to more personnel layers, making this distinction. This gets magnified if you have a managed account through a brokerage firm.
If you have money invested in this way you may want to study your holdings and look for whether your portfolio adequately covers what you need your investments to cover. You may need to fill some gaps that a manager managing 10,000 accounts can't cover.
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3 comments:
Roger,
I have read the Barron's article and I just don't understand the difference and/or the disadvantage of owning a group of professionally selected individual stocks in a discount brokerage account (what I understand you do) and having a "Separate Managed Account." with Schwab (except more fees!).
Can you Clarify?
Thanks, Jim in LV
Jim,
I'm not sure I follow the question. If I miss with my answer please let me know.
If a manager manages billions in assets it becomes harder to access certain and potentially important themes.
If a manager has $30 billion how can they take a position in $2 billion dollar company? Two percent of $30 billion is $600 million. The manager isn't going to by more than a quarter of a company (as per my example). So then they have to have three or four small cap widget companies to choose from. If they study and analyze all four they will likely favor one over the others but not every client will get that favorite. Or some other concession will have to be made.
The disadvantages of hiring someone small would be more along their ability to make good decisions. I have met quite a few smallish money managers in my time and I have been surprised how many of them don't really understand a whole lot about markets or are willing to put everyone in the same collection of OEFs.
If you watch a lot of stock market television you may notice that some of the people that come on are oblivious to fairly important things happening in the markets. In the little bit of TV I do, they go to great pains (more than necessary for me) to make sure they don't stump me.
I am driven to not be stumped too often, I would not want someone managing my money, for example, to have no clue or understanding of what is happening with the dollar.
This is not a shill (spelling?) to hire me. Our maximum capacity for clients might be another 100 people, and maybe not even that, and this site has about 1100 readers a day plus however many people read my content elsewhere on the web.
Again, if I missed the point let me know.
One thing I noticed from the article was "SMA's seem to have great similarities to the mutual funds the same company manages. For example, Dodge and Cox has a balanced and a stock SMA's, it also has a balanced and stock mutual funds(DODBX and DODGX)with comparable returns. Barron's article did not get me too excited about shifting my mutual funds into SMA's because I still have to worry about allocation in addition to choose which SMA to put money into. The tax saving of a SMA in a after-tax account is, however, very real.
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