We think Wealth Managers Should Eat Their Own Cooking
Louis Lowenstein was a successful corporate executive and law professor. In the last three decades of his life, which ended in 2009, he was also an influential critic of the money management business. Back in 1988, a Barron’s Cover Article said of Mr. Lowenstein: “Merrill Lynch, meet your worst nightmare.”
In addition to lambasting the investment management industry for its practices, Lowenstein took individual investors to task for being too short-term in their investment thinking.
Lowenstein’s mantra: investors have forgotten stocks represent part-ownership in a business. “If you buy on that basis, you have made a judgment about that company and its businesses over the long term. No sensible investor would change his mind in a few days or a few weeks.”
Lowenstein wasn’t simply a gadfly, however. He respected those in the industry who do a good job and articulated four attributes that are common among the best managers and they ring true to me:
The best managers hold concentrated positions, about 20 companies. They have low portfolio turnover. They employ themes and/or variations of the Graham & Dodd value approach. They “eat their own cooking.” Meaning they have a substantial amount invested in their own strategies.
An article last month in Investment News entitled, “Portfolio Managers Should Eat Their Own Cooking,” caught my eye. The author, Jeff Benjamin, reports on a study recently conducted by Morningstar that found just 40% of mutual fund managers invest in their own funds.
There are some technical reasons why this number is so low, but as a firm believer in the owner-operator business model, I find the number of managers who “eat their own cooking” is astonishingly low.
So what’s the correlation between performance and “eating one’s own cooking” in the above study? Morningstar reports managers who have over $1 million invested in their own funds have an average star rating of 3.5 versus a star rating of 2.9 for those with no money invested.
It seems like common sense that this would be so. Having little or no money in a strategy you’re managing is like renting; while having a meaningful amount is like owning. All things being equal, who’s more likely to take better care of an asset, a renter or an owner?
We believe finding an advisor or manager who invests in his or her own strategy is an important factor when looking to delegate the managing of one’s money.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Donnelly Steen & Company), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Donnelly Steen & Company. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Donnelly Steen & Company is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Donnelly Steen & Company’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
Martin Leclerc is a Registered Representative of Coastal Equities, Inc. and an Investment Advisor Representative of Donnelly Steen & Company. Neither Coastal Equities, Inc. nor Donnelly Steen & Company is associated with Barrack Yard Advisors, Inc. Securities are offered through Coastal Equities, Inc., Member FINRA/SPIC, 602 Main St., Suite 801, Cincinnati, OH 45202. Investment Advisory Services are offered through Donnelly Steen & Company, a US SEC Registered Investment Advisor, 1201 N. Orange St., Suite 729, Wilmington, DE 19801.