Let me start off this column by saying that I don't know anyone at the
, I haven't spoken to anyone there and I certainly am not in the business of kicking people while they're down. But unfortunately for them,
The Wall Street Journal
last week was not so charitable, and painfully chronicled their fall from grace. But the issue at heart is much larger than the Lindner Funds -- and it has implications for many fund managers and their clients and shareholders.
The main issue raised was that while the recent performance of many value managers in general has paled relative to their growth counterparts (redundant words if I've ever read them), the Lindner performance in particular has been dismal. The board of directors of the investment adviser who runs the funds (where was the board of the funds themselves, I wonder?) has brought in the pension consultant
Vantage Consulting Group
to sit on a newly created investment committee for "a few months" and generally "consult" on how the firm runs its business of investing.
This is very interesting stuff that creates gut-wrenching conflicts between the left and right side of a professional money manager's brain. On the rational side, one can see that there is clearly a need for a fresh look at process and personnel at
, the investment adviser.
The Hidden Price of Success
It is always a fight for any successful organization to maintain "freshness" and not to get trapped into rituals that cannot survive a change in the environment. When you are being exalted as the Messiah and the money is flowing in, it becomes very, very difficult to change stripes. Anyway, you're too busy being interviewed by financial television shows and flying around the country to make presentations to give it much thought.
Then one of the basic rules of investing sets in, and the seeds of your demise are sown in the wake of your success. You are inevitably paying less attention, competitors rush in at the top and pay silly prices for your wonderful ideas, expectations can't possibly match the multiples and your stocks are then in the doghouse. (Yes, this still happens, net people.)
So, on the surface, bringing in consultants to re-look at your process, "benchmark" you versus your competitors and take a fresh look at your holdings might not be such a bad thing. I do the same thing informally with a competitor of mine. Twice a year we meet for lunch, exchange portfolios and generally badmouth each other with "what kind of an idiot would still own this" type of comments. Contrary to what you might think, it can help to get you thinking out of your little box.
In fact, there is a whole industry of firms like Vantage, so that what Ryback is doing is not completely out of line. Most though, tend to focus on improving your marketing, reviewing financial issues and doing strategic planning -- not investment decisions.
On the right side of the brain, a number of money managers consider the idea of bringing in a consultant to review holdings and comment on the investment process as a complete anathema. While constructive criticism and healthy debate is key to a good investment process, there is nothing worse than the feeling of managing money with someone looking over your shoulder all the time.
In such an environment, managers get "scared" out of their best ideas because they think it won't "fit" with the current regime. It ruins the entire creative process and ideas get culled down to the most common denominator, which is the force that has created such innovation as prime-time television.
No firm run by consultants or a committee will be successful in the long run in the investment business. The best firms successfully maintain a balance between running an "organization" with structure and a process, and on the other side letting talented people do their best. Interestingly, the manager of the only Lindner fund with a hint of a decent record (a very relative term in small-cap) left.
When Heroes Become Villains
The other major issue in the piece obviously concerned the state of the union for the value-based money management style, which needless to say is dismal. The spread between what has "worked" over the past two years -- large-cap, growth, momentum, closet
indexing -- and everything else has widened to the point that careers are being ruined.
And it's just cold, hard math. Let's say a hypothetical value manager was up 14% four years in a row, outperforming the benchmark by two percentage points every year. This would squarely put him in the top quartile of all money managers and life would be good.
But what if in the fifth year, the benchmark is up 28% and the value manager was up 10%, which was a very common result last year. The five-year return becomes 225% for the benchmark and 185% for the value manager. No matter how you torture the numbers, it just doesn't look good on a graph. Four years of being "the smart guy" disappears, and disappears for a long time, until that miserable fifth year drops from the performance records or there is a sudden and very sharp reversal of the current environment. Some brilliant, brilliant careers of value legends are being buried (temporarily I hope) under this math.
"Things change" still should be a model to live by (and was a great movie with
) in the investment business and "when" will still always be the toughest answer. So far, at least, the underperformance of so many value managers translates into selling pressure and worse performance for many "value" stocks. Meanwhile, it is safe to say that the opposite is in full force in S&P 500 index funds and their kin, the actively managed funds.
While "value" means a lot of different things to different people, what biased words of wisdom do I have for investors in value-based funds? Obviously, more than performance is amiss at the Lindner Funds, and that may justify the call for radical change in the way they pick stocks.
But it's different for a well-run value-oriented shop that is just laboring under the oppression of an S&P 500 that is overweighted in growth and large-cap issues.
Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell (www.rcbinvest.com), a Los Angeles-based money management firm with about $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, neither Bronchick nor RCB held any positions in the stocks discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at