I want to emphasize that all of this is a rule of thumb, and there are plenty of exceptions. That said, given the amount of time the average investor can allocate to investment decisions, rules of thumb can turn out to be extremely important.
To understand the thesis it is important to acknowledge that becoming a lead portfolio manager at a prominent fund of any kind is a process similar to any other business – you start at a junior position and work your way higher. In this case, a fresh-out-of-good-or-local school plebe begins by learning how to extract data from Factset or Bloomberg and enter it without error into spreadsheets for the perusal of the important people. At this level you also get to return phone calls on the manager’s behalf (again, without screwing up) to minor or really annoying acolytes. Next, success or attrition leads to a junior analyst position where participation in the stock selection process begins. Success here leads to a senior analyst position where lead PM becomes a possibility.
Two basic personality types rise to the top in these instances:
Type One: Physically attractive, Ivy League (Harvard or Wharton, almost always), momentum-based investment strategy. They are tireless – they are too humble to mention it themselves, but the minder who introduces them to your little group will just happen to mention that the star is just off the plane from [insert city name here] and has only had three hours sleep. Most importantly, the Type One will have Bill Clinton-level public speaking skills. They will be compelling, energetic, will pause and answer your question in a non-patronizing way. They will linger after the presentation until everyone has left, happily chatting about markets or whatever else the fellow-lingerers want to talk about. They will likely choose someone during a long day of presentations as a “person of influence” – analyst, strategist, whoever – and invite them to a dinner during which the sentence “I went to school with him, I’d be happy to call him for you”, is inevitable. They are, in short, marketing machines.
Type Two will be older, having spent far more time as a senior analyst due to a dearth of personal charisma. They will likely not be Ivy League. Type Two will execute a more fundamentally-based investment process. Their longer performance track record has a better chance of being stronger, beating the index by a few percentage points per year by holding value during bad years. Type Two’s presentation will be so dull that you’ll want to gouge out your eyes after half an hour.
Outside of the entertainment factor, the primary differences between the two archetypes is that the first has risen to their position by attracting new money while the latter holds their position by effectively managing money. Type One, with a travel schedule encompassing 150 days annually is dependent of their model for performance because they have much less time for specific analysis – hence the preponderance of more black box, momentum strategies. They are also much more dependent on their analysts and traders back at the office who must make the majority of the day-to-day decisions. Type Two on the other hand, only really cares about the analysis. They are pissed when the marketing department drags them put of their cave before they’ve finished investigating a fishy footnote in the last quarterly statement. (Don’t think I’m exaggerating with that, btw. I personally know PMs that will spend weeks on a single footnote).
Here’s the important part: the industry loves them some Type One PMs. Momentum managers trade a lot more than value managers and this keeps the trading desk commission train rolling. The accommodating Type One manager is, unbelievably, available for evening functions where Financial Advisors can bring their top clients who, inevitably will be running around with blank checks by slide eight. Everybody makes money.
If you’ve read this far you have probably guessed where my preference lies. For my own money, I would much rather have the plodding, boring manager who obsesses about every aspect of a potential or existing holding, rarely straying from a concentrated portfolio of companies they are completely comfortable with. Like Buffett, they do not feel compelled to make changes (and thus rarely get referrals from capital markets) and will literally wait years for a stock to drop to valuation levels they find attractive. Type Twos will also avoid hot sectors and thereby escape the attention of the individual investor until the market craps out, and they don’t feel like putting more money into the market anyway. I pay Type Twos, in other words, to exhibit the discipline that I don’t have.
Again, I have to emphasize that there are a lot of cases where Tony Robbins-type managers are also very good investors and, alternatively, Ben Stein-in-Ferris-Bueller clones who should never be trusted with your money. But it remains important to understand the industry’s bias in this regard and that “best manager” may mean something much different to the average investor than on the trading floor.