I’ve written many times about the appeal and advantages of index funds. From low cost to full transparency, index funds — even more modern, non-cap-weighted versions of them — will rarely disappoint. They execute on a predetermined methodology. But just like the bias against robo-advisers, sometimes institutional and retail investors want an actual person behind the curtain — especially in volatile years, as is 2016.
I got a chance one afternoon to talk to some of the best active managers as part of Institutional Investor’s annual U.S. Investment Management Awards, which honor the best firms in 30-odd equity, bond and alternative categories. For the past few years, we’ve produced a video series to get at the heart of these investors’ stories and the personal experiences that inform their approaches. This year’s interviewees didn’t disappoint. The best active management — and why it still works — relies on people, their human judgment, their backstories and the lessons they have drawn from their good and bad experiences. An active manager is the sum of many parts. He or she may have a process, but it has personality and character beyond the models and if-then scenarios.
When you’ve scheduled six videos to be filmed back to back in half-hour increments, it’s never a good sign when your first interviewee is 15 minutes late. Nonetheless, I immediately forgive Bob DiMella, co-head of MacKay Shields’s Municipal Managers, when the disheveled investor tells me it took 20 minutes to go four blocks in a New York taxi to reach the Mandarin Oriental, just off Columbus Circle, at the southwestern corner of Central Park.
I’ve tormented myself many times in New York traffic, doing the mental calculus to determine whether it would be faster to jump out of the car and try to run to my destination or stay in the cab. (Unfortunately, I would say I get out of the taxi a good 80 percent of the time, and likely arrive at my destination far later than if I had stayed for the ride.)
Although our video director, Diana Panfil, thinks we might be able to squeeze DiMella’s conversation with me into the remaining 15 minutes if we steal five from our next subject — apologies, Rick Rieder — I really want as much time as possible with him. He co-founded the firm with John Loffredo in 2007 before MacKay Shields bought it two years later. Both worked at BlackRock (Rieder’s firm) before that. Municipal Managers is an active management firm in a segment that has historically been dominated by individuals who plan to buy and hold the bonds forever. DiMella and Loffredo are the guys who sold all of their Puerto Rico bonds by April 2012, long before they were trading at substantial discounts. I want to hear that and other stories about the huge changes in the once-staid municipal bond world in full. After a little schedule shuffling, I get Bob to agree to come back at the end, when we would tack on overtime pay for the video crew and I would get to talk with DiMella a little longer. (Though you’ll have to wait for the video to find out more, I love that DiMella still keeps the key to the front door of the asset manager he co-founded almost ten years ago.)
Rieder, whose firm BlackRock won in the Unconstrained Bond category, is next on the roster. Though I’ve talked to him many times about his Strategic Income Opportunities Fund — once for one of my favorite stories, an-depth 2014 piece called “A Brave New World for Bond Investors” — I’ve never met him in person. Rieder, CIO of global fixed income, whose voice over the phone belies his baby face, runs a fund that isn’t tied to popular benchmarks like the Barclays U.S. aggregate bond index, invests globally and switches it up among different securities to provide diversification and yield. It was BlackRock’s answer to the huge changes taking place in the bond markets after the global financial crisis. I’m eager to talk to Rieder about the personal experiences that have shaped his investment thinking, and how he prevents himself from falling into traps that seem to befall even the most sophisticated stock and bond pickers.
Rieder says it’s his ability to cut his losses. “You may be right on a situation, but markets may not think you’re right at that point in time. So you need to reevaluate, and maybe you’re supposed to put it to the side, get out of it and come back to it at a later date,” he says. Rieder also highlights the odd conundrum in asset management. In school, we’re taught that we should get it right 95 percent of the time. But in markets, Rieder concedes that he had to get used to being right in 65 to 70 percent of cases. It’s what I wrote in my 2013 article, “Is Alpha Dead? Beating the Market Has Become Nearly Impossible”: The markets attract increasingly brilliant people who have developed all sorts of ingenious ways to get an edge on their rivals. Rieder says, “In markets, people have a tremendous amount of acumen.” You just can’t beat them all the time.
There is a way to beat the clock, however: To be not just on time, but early. That’s exactly what Mike Roos, who runs communications for Artisan Partners in Milwaukee, did in true Midwestern form. Roos and I became fast friends once he learned I grew up one state over, in suburban Minneapolis. With a smile on his face, he is quick to point out that he had gotten Matt Kamm, a portfolio manager on Artisan’s growth team, to the Mandarin well in advance of our 4:30 p.m. appointment. Alas, at that point I knew we were thoroughly behind.
Kamm, with big glasses and heavy sideburns, brings a different perspective to his job of stock picking. Before going into investment management, Kamm, the son of a doctor, studied public policy at Duke and went into hospital administration, including a stint at NYU’s Langone Medical Center. In 2003 he joined Artisan as a health care analyst. Although Kamm says Artisan looks for people with an outside perspective, he admits he wants people on his team who are early enough in their careers that they haven’t picked up someone else’s investment process. Echoing Rieder, Kamm says he can’t be right all the time, but “our process helps reduce the severity of our mistakes.”
The markets have indeed attracted accomplished people. Next up is Gideon Berger, head of risk management and technology for the hedge fund solutions group at Blackstone Group, winner of the Funds of Hedge Funds category. Berger, who has a Ph.D. in computer science from the Courant Institute of Mathematical Sciences at NYU, was a card counter when he was an undergrad at Vassar College. Among other things, it helped him buy beer, he says.
Berger says investment managers are like baseball teams: They all do the same thing, have the same number of players and want to win the World Series. At the end of the season, though, one will be in first place, one in last. The wins come from the disciplined execution of the game. What comes to mind, though, is those ubiquitous interviews with professional ballplayers after a game, asking why a team lost. “I just didn’t locate my pitches well,” says one, or “I didn’t execute on the fundamentals well enough,” says another.
With his enviable background, I expect him to talk about an investment edge coming from intellect or smarts. Instead, he says there are so many smart people, and he tells the story of a summer intern at his firm from Harvard Business School who made a great presentation on an investment idea after just one month of learning about Blackstone’s process. Although Berger was impressed, he notes that these skills must be commoditized if someone can do them after a year in business school. “So what can you do to differentiate yourself?” he asks. Hard work. “We talk a lot about Masters of the Universe, but what we don’t see is all the work that goes into it. I think it’s that simple: Do the work, do it every day, set high expectations, and pay close attention to every detail.” Maybe it really can be about the meticulous execution of the same game. Perhaps the ballplayer just wasn’t working hard enough when his team lost.
It’s been a long day in a crowded suite at the Mandarin, but Gilbert Garcia of Garcia Hamilton & Associates in Houston is on fire, making everybody laugh and ready to talk. Garcia, whose firm has won in the Intermediate-Term Fixed Income category, got his start on Wall Street in the early 1980s when an organization called Sponsors for Educational Opportunity helped him get a job on the trading floor of Salomon Brothers. He echoes Berger in that he learned “hard work, to be early, be prepared, dress well and sit in the front row.” For him, though, he made one big mistake, and he’s never let go of the lesson. In the late 1990s, he purchased Yankee bonds without understanding currency or geopolitical risks. With the Asian financial crisis in 1997, he realized he had gotten caught in the mania. “From that moment on, we’ve avoided the hype,” he says in his signature voice.
Though David Booth, co-founder of Dimensional Fund Advisors, and Gilbert Garcia both had modest backgrounds, the two couldn’t be more different. As I say goodbye to Gilbert, a Texan, with his booming voice and repartee with the video crew, I welcome Lifetime Achievement winner Booth, whose firm nurtured and built a business around Efficient Market theory. He is not a booming Texan — even though Dimensional is headquartered there. Perhaps that reflects his upbringing in Kansas. Needless to say, I’m excited to talk to Booth, whose firm became the birthplace of strategic beta.
True to form, Booth is a beta guy: unexcitable but intellectual. Booth and I talk about a range of issues, including politics. I laugh when he tells me that the active-passive debate is now a whole lot less emotional than it was 45 years ago. “Active and passive can coexist,” he says. “Unlike Congress,” he throws in. What has changed, Booth says, is that a couple decades ago, institutional investors assumed they could find managers who could consistently beat the market. “Now there is a lot of doubt they can do that. Nonetheless, the managers themselves are undeterred.”
Yep, I just talked to them.