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MR. RITTENOUR: Could I talk a little bit about index funds as it relates to the high-net-worth market? I think we all understand that index funds mean a lot more now than just the S&P 500 or what-not. You can really index to any benchmark you create.
I don't think it's appropriate to automatically think that indexing means lower fees, particularly if more effort is given to the implementation of servicing of the product to the client. It is particularly true in the high-net-worth area. It relates to this whole issue of after-tax performance. We all know as consultants that a positive alpha is pretty difficult to consistently get with any core manager; we all know that it's really difficult net of fees.
We have lots of large family portfolios that have moved their core strategies to the actual benchmarks they used to use to measure their active managers. They've done it, not because their managers didn't do well, but because the effect of taxes are so dramatic. At 50% turnover, which is low for an active manager, it costs 200 to 300 basis points per year.
P&I: Are there any core competencies that are common across all successful money management firms - let's start with equity firms, equity firms of all sizes.
MR. PEYTON: I would say the No. 1 attribute is strong leadership with a vision of what that organization should accomplish.
I think another core competency is absolutely seamless client service. There is a significant portion of the marketplace that wants to feel important and well serviced, and that is the strength of a smaller or medium-sized organization, and there will be large organizations capable of doing that.
Another attribute is a clean and clear decision-making process, strong incentives and then good and consistent performance.
MR. EAGER: I think consistency in everything they do. There are no holes. There are no cracks. You get the same story no matter who you talk to.
I haven't done searches in 12 years now, but I'm thinking back to my search days. I could sense very quickly in a meeting whether the firm was striking up a good bond with the potential client.
The firms that did well were the firms whose investment people did a good job marketing, presenting themselves, being enthusiastic, being knowledgeable. You want to do business with them. There is a strong personal element there.
MR. SCHWARTZ: Strong leadership with vision, clearly is critical for the success of any size firm in this industry. And understanding, even at a small firm's level, the difference between successful leadership and vision on the portfolio management side from the business side of the business.
Too many firms fall into the trap of assuming that running a portfolio well is the same as running a business well. The better firms make those distinctions, and differentiate between the chief investment officer and the chief operating officer, and those are the ones that are best poised for success.
Secondly, I think it's conviction of what you do on a daily basis and certainly a hunger to do it well. That means telling your story consistently. That means coming to a client to show them that you've been unwavering in your application of a philosophy, and the performance to me is always the proof statement of that.
MS. DEBATIN: I have a firm in mind - I started working with them around 1985. They have all these earmarks we talked about. They have three principals who know each other, I think like each other, probably spend their time together outside of the business as much as they do inside the business. They have a mutual respect for each other. They clearly have vision and they have focus. Their investment story never changes.
But there's one thing they do have that I don't think was discussed here. They have a tremendous back office. They will tell me when a custodian is not doing well. They will get their reports out before anybody else. They happen to not be in the United States, yet they have someone there who will respond to you at a 5 p.m. call.
MR. EAGER: Can I add one quick one? They create the proper expectation right off the bat.
MR. KNUPP: I would say there are probably more differences, based largely on size, than there are core competencies that exist. But there may be three areas that are key no matter what size the organization:
You have to have effective marketing for your size organization;
You have to have effective management leadership whether it's the CEO or CIO. Whatever the process is, it has to be effectively run;
You have to have talented people. A firm of any size must have talented people to be successful.
P&I: What about process, investment processes?
MR. KNUPP: I think there's a lot of room for innovation and differences in investment process.
MR. EAGER: It's got to be grounded on a philosophy that people agree to, that makes sense, that could be substantiated.
MR. PEYTON: And clear decision-making is a process.
P&I: Ralph, what are your thoughts?
MR. RITTENOUR: Well, you know, it's really been interesting to me to hear all these collective comments because - and I agree with all of them - I was a principal in a small firm for 12 years, and we tried to do all of those things. I didn't hear process used much, and I didn't hear performance mentioned either.
I think you can be all the things that we said and still not perform. It's the art vs. the science part of the investment management business. Or maybe better said, you can go through a significant three-, four- or five-year period where you're sticking and doing all those things well and not perform and your clients may not wait for you to get through that period.
All that being said, if I were starting a firm, small or medium, that's what I would do because I think what we're really talking about is service, particularly at this stage now in the 1990s as opposed to the 1970s. People want to hire you because they like you, because you sound good, because they believe in you. They believe in the process. I think to survive it's going to be important to have a good back office. It's going to be important to have an excellent receptionist, who when you call up doesn't transfer you to the wrong number. The most important thing I think is the confidence in your portfolio manager or your relationship person. When you sit down, that they trust you; that