Should pension sponsors scrap narrowly defined specialized money management, acknowledge it has failed, and embrace Richard M. Ennis' "whole portfolio" concept? This investment strategy endorses hiring a combination of index managers and active managers with the ability to cover the entire market, making timing, sector and security bets. Mr. Ennis promotes the idea as an alternative to the common practice of assembling a team of specialists managers, pigeonholed by particular styles from small- to large-cap, from growth to value. Is the concept proposed by Mr. Ennis, chairman of Ennis, Knupp & Associates Inc., Chicago, new and promising?
Thomas M. Richards, principal, Richards & Tierney Inc., Chicago, believes the whole portfolio approach is not that new.
"It's a return to the investment world of the late '60s and early '70s," he said in a presentation in November to the Investment Analysts Society of Chicago. "Fund sponsors abdicated their investment responsibilities and turned all investment decision-making over to large investment organizations, who were referred to as `generalists' or balanced fund managers. This investment approach produced inferior results back then - I know, I was there - and I believe it will do the same in this day and age."
Mr. Ennis himself has been around for a long time, earning a reputation as a well-respected consultant.
Mr. Richards agrees with much of Mr. Ennis' premise, that pension sponsors generally have been incapable of structuring and managing a team of specialized managers slotted into a diverse set of styles.
Richards & Tierney believes strongly in active management; Ennis Knupp generally advocates a core of index strategies. Mr. Richards said Richards & Tierney can identify active managers that add value and "structure the team of value-added active managers and manage the (pension) fund's risks." It doesn't pigeonhole managers by style. "Our primary criterion is whether or not the manager can produce investment value-added," he said in his presentation. "We do not impose arbitrary constraints in this identification process," like growth or value.
"Our clients have the results to prove" the firm's method works, Mr. Richards said. He cited the performance of a number of Richards & Tierney's clients, all unnamed, which have achieved their investment objectives, exceeding benchmarks with little or no index management.
Messrs. Ennis and Richards clearly think the model commonly used for pension investment management needs to be changed. "In a sense we agree with Richard (Ennis)," Mr. Richards said in his presentation, "that the primary cause of this disappointing performance is an inefficient manager structure."
"I do not disagree that active management, in total, has a mean or average return less than passive management," Mr. Richards said in his speech. "But just because the Mississippi River has an average depth of three feet does not mean that large ships cannot go up and down the river. However, for a ship to travel up and down the river, we need someone who is experienced and knowledgeable and who can successfully navigate the ship in difficult waters and essentially tilt the odds of a successful journey in the ship's favor."
Whose approach is better? Only empirical data from sponsors that try either method will tell. That will take time. Sponsors, unfortunately, can't wait for results. They have to risk choosing between the two, or using some other strategy, always trying to navigate that river that never stops roiling.