Born and bred in the Midwest, Matthew D. McCormick is very comfortable as he traverses the country and world pitching the money management services of his employer, Cincinnati-based Bahl & Gaynor Investment Counsel, to pension funds, endowments, foundations and other institutional investors. Bahl & Gaynor is only the third employer Mr. McCormick has had since interning at Dean Investment Associates in the late 1980s and he's not likely to move anytime soon, which is OK with him, too. That's just the way the firm's founders — William F. Bahl and Vere W. Gaynor — want it.
“Their way of approaching things is a little bit different,” Mr. McCormick said, referring to the founders. “We're 100% independent and we want to keep it that way. When you have ownership, that's the best way to attract and retain great people. We've only had three portfolio managers ever leave the firm and that was all due to retirement.”
This year, Bahl & Gaynor marks its 20th year in business and if Mr. McCormick is correct, it's been a success. “We're close to $3 billion” in assets under management, he said. “Bill Bahl and Vere Gaynor thought they'd be successful if they hit $200 million. They set up the firm to be a small boutique firm that can add value.”
And that's where the Midwest sensibility comes into play. “I've been very fortunate to travel to a lot of different places in the world and I get to compete against some great firms, but the Midwest is home, especially Cincinnati,” Mr. McCormick explained. “There's a certain aspect about being in the Midwest, about the culture, the way you manage money, the way you interact with people. There's great balance.”
What's different about Bahl & Gaynor than some bigger money managers? When you come to our firm, you buy into the philosophy; you buy into the approach, which is high-quality stocks with dividends. So you have a common theme, a common purpose. And if you're an owner, you think differently than if you're an employee. You manage assets a little bit differently vs. going for something that may serve your short-term interests but maybe not your clients'. If you look at how we manage our firm and our products, stability and consistency are stressed again and again and again. We can't guarantee performance, but we can stick to our discipline.
Has stability and alignment of interests become more important to clients and potential clients after the credit crisis and recession? Let's face facts — results are still the bottom line. People want performance, but they also want to understand a process, they want to feel comfortable investing and that aspect of feeling comfortable is important. If performance was the only issue, there'd be about four or five managers.
What I'm seeing is that the ability to perform is still very much topic “A” of conversation, but topic “B” is how you do it and those intrinsic suitability issues are becoming more and more paramount.
Today there is more competition for assets, especially on the institutional side, and if you get to a final (competition for a mandate), people are looking for reasons to exclude, not include. So whether you're a large firm or a small firm, you're going to have to quantify and qualify how you're on the client's side.
Are you getting asked more questions from potential clients and consultants? We're spending more time on due diligence — talking about what we did as an organization through the downturn, how we handed that financially, what we learned. It's easy to make money in an up market, to add value. But when you go through a bear market and volatile times, that's when the true stripes of people and an organization come out. That's where, as a firm, we set up a whole strategy to protect on the downside, to get clients through the difficult times with the least amount of hits to their portfolios as possible.
How successful have you been at that? We've had very strong growth in assets under management, with $34 million net new (inflows) year-to-date. And we're OK with that. We're not looking for the massive funds that mean one client will dominate our firm. We realize we're not the typical Russell 1000 Growth manager, but when somebody's willing to sit down and talk with us and do some truly consultative work, we're starting to see more people say, “OK, it's an interesting story.”
So what's the story? We're very big believers in active management. We're extremely optimistic on high-quality, dividend-paying stocks. We think if you index right now, essentially you're locking in a low-quality rally. One-third of the market is driving returns ... the equity rally has been led by TARP names, low-quality names. In '09 that hurt us because everyone went into these entities, but there's no way I'm buying some of these names with a beta of 2.3, no earnings and highly dependent on the government for their success.
Right now, you're seeing some institutional investors doubling down on risk because they need to make some actuarial assumption or meet some bogey and we're saying you may want to moderate your return expectation and go with something more consistent. You can still add some alpha but it's going to be more difficult to attain. If someone wants to say, “I can go out and get stronger returns from a hedge fund or private equity or venture capital,” we'll say yes you can, but you're going to add more risk, and our whole firm is about getting the client's objective with lower risk and lower volatility.
How does a firm like Bahl & Gaynor grow? Margins in our industry are such today that we're extremely profitable even if we don't gain one more dime. But we have to grow and the way we're growing is by focusing on consultants that like the high-quality growth income, dividend income approach. We're focusing on regional consultants and consultants associated with wirehouse firms that deal with not-for-profits and public plans. ...
There's a lot of money out there and if we got to $5 billion (AUM) we'd be tickled pink, but we're not going to do it in a way that's going to risk the firm. We prefer a slow growth approach.
From your perch in the Midwest, how do you see the money management business shaping up? It's still in a digestive phase. 2008 shocked many people in terms of the valuations of firms, and some people had to take haircuts they didn't expect.
I think there's going to be a bifurcation. There's going to be the big guys that are everything to everybody. Those firms are already there or adding on, like PIMCO that's getting into the equity market. Then you're going to have the specialists that are more nimble and more focused that know they can't be all things to all people.
That middle is where the fight is going to be. That's the area I would not want to be in because you're not big enough to compete against the PIMCOs but you're not small enough to compete against the more nimble specialists.
I think you're going to see people in the middle grow or spin off some divisions. So there's going to be a shakeout in which I can see the big getting bigger and the smaller becoming more specialized and focused in being very, very good at what they do. The guys in between are going to be the ones in the cross hairs.