James E. "Jimmy" Stowers III was born into the investment management business. His father, James E. Stowers Jr., founded Twentieth Century Investments — now American Century — in 1958. Mr. Stowers joined the company in 1981 after college. He is the "jack of all trades," having at various times been president and chief executive officer, but now he focuses on the investment side of the business. Mr. Stowers studied engineering and finance in college, which fueled a keen interest in the process of managing money and the supporting technology. To that end, Mr. Stowers has assembled a specialist information technology team, including an engineer who worked on anti-submarine warfare systems who now writes neural networks applying pattern recognition to stock price behavior. Mr. Stowers spoke with senior reporter Christine Williamson about a return to creative money management and the necessity of abolishing style boxes.
A A topic that has come up of late that I think needs a lot of attention by this industry is what have been described by the press as free-range funds. The portfolio managers go out and do whatever they want to do: They're kind of characterized as Peter Lynch-style funds. When he invested, his goal was to find good businesses, companies that he could understand, companies he felt had long-term success potential, and to be able to buy those whether they were large cap, small cap, whether they were value or growth.
When you talk about style boxes, a lot of it is timing. It just so happens, you bought that stock, it's up 50% and now it's no longer midcap, now it's large cap. But I have to sell it because I'm a midcap growth manager.
A The best way I combat the style-box phenomenon and its negative impact on the creativity of investment managers is to look at a study I had done to determine what it would take to be top decile if I were lucky enough to migrate the composition of my portfolio enough so that Lipper would categorize my portfolio in the best group each year. If I was successful in getting into that style box and only achieved 84th percentile, and I did that consistently for 10 years, I would be top decile. So every year, everyone would say you never did better than 84th percentile and they would never come close to buying your fund, when in fact, it was top decile.
When clients look at alpha and they look at relative performance, they are looking at a group. So to say that you were the No. 1 performing fund in that group, it could be the worst performing group for that period of time. There are a lot of people being paid tuition, if you will, to manage money, and they're just hugging the benchmark. And they think, ‘If I can just knock a few basis points out above the S&P, I'm not going to get in trouble.' And they're getting the full fee for that when in fact, it's a quasi-enhanced index and they should be charging 20 basis points for that and it should be one person in a black box.
I think the market and Morningstar and others have caused us to try to provide a little more definition — I don't want to say pigeonholing — but (made us) try to define a region of the style boxes where we might hang out more often. And I don't think it's been as good for the industry or for our shareholders. We are loosening the reins on that activity, and we're doing that in a controlled way.
A I think that's one of the most frustrating conflicts the investment community has right now is trying to distinguish the talents of an investment professional against those of a consultant. And if a consultant has all the answers, then she really should be looking for the commodity, style-box manager and move the money around appropriately for the client.
Where I think the consultant and the investment community can end up in a conflicting situation is when you have somebody who has talent and you're asking them to remain pigeonholed because that's where you happened to find them that day. Again, it's a point in time: ‘When I stumbled across you, you were midcap growth, and now you're large-cap growth. I've got to let you go.'
That's the difficulty for the consultant. ‘Do I have enough confidence in this individual to let them float around a little bit more?' And what does that mean for some of the other components of the overall makeup (of the portfolio) of this client?
Interestingly, I met up with a consultant whom I haven't seen for about 18 years and I shared with him this frustration. And he said, ‘That's exactly where we're starting to see things go.' He's probably been in the business for 30 years and he's seen it come full circle.
A It was kind of a default, we were always so busy here. So I came here out of school. I'm kind of a jack of all trades. My interests have always been electronics, engineering. I love to build things. What's been great about this experience here for the last 22 years have been the opportunities I've had to build processes and to engineer systems that help to monitor, oversee and guide the investment process of various teams. And that's where I spend an enormous amount of my time, building these systems — more so today than I have for some time. When I started, I did a lot of programming for the shareholding accounting system, and later, for the investment systems we use. And more recently, I've been helping to develop and refine the systems we use to monitor investment processes in the U.S. equities discipline.
A People need to know what they own. Are there things that are showing up that demonstrate outlier characteristics of the core process? Of the universe of stocks I could invest in, are there things I should know about them on a real-time basis?
The most frustrating thing for a new investment professional is their inability to really get their arms around what they should focus on. What I've tried to do with these tools is get people focused on what is important. It's not the entire answer to their research problem. As my dad has described it, it's like being hit upside the head with a two-by-four. The systems say ‘Here's something you should pay attention to. Here's a collection of stocks. Here's a subsector that is displaying characteristics you're interested in.' These aren't tools you can buy off the shelf.
A If I could do it over again, I would have gone someplace else first, just to get a different perspective. I feel like I'm pretty vanilla sometimes in my thinking. I wish I had had other experiences. But I did see quite a few companies, I spent quite a lot of time traveling early (on), so I felt like I got quite a few different perspectives. But I think diversity of thought is important. If everyone around here got hired from Kansas City and were born and raised in American Century and grew up under our culture, it might be a lot more homogenized. And you really wouldn't have that valuable diversity of thought and ideas.
A I'd just relax. My hobby right now is a 3-year-old and a 1-year-old at home. That's where I spend all my time.