Ralph Segall first became interested in stock markets as a teenager. He believed the best way to become a successful stock picker was to be trained as an analyst, which was his first position 42 years ago at the bank trust department at what is now Northern Trust Corp. In 1976, he moved to Stein Roe & Farnham, where he met Alfred Bryant and Jonathan Hamill, with whom he founded Segall Bryant & Hamill Investment Counsel in 1994.
The firm's flagship all-cap equity and core fixed-income strategies have outperformed their benchmarks in most time periods since inception, according to data provided by the firm. “It's boring. We just keep doing the same thing over and over again and it works,” Mr. Segall said during an interview in the firm's conference room overlooking the Chicago River and Boeing Co.'s international headquarters.
The most substantial change for the firm came in 2006, when Messrs. Segall and Bryant passed their co-CEO titles to Philip Hildebrandt, then the firm's marketing director, so the founders could focus on managing client money. Mr. Segall said the results were immediate. While the money management industry was undergoing massive layoffs as a result of the financial crisis, SBH was hiring and putting together a track record that has provided “all the runway we need,” he said.
What is the best change you've seen in the money management business? The democratization of information flow. Back in the day, one of the competitive advantages that larger firms could boast of was that they could talk about “well, it takes a big firm to be able to afford all of the analysts that are necessary to go out and find the information,” and the Internet was/is/will be a transformative technology. One of the ways it transformed the investment business was that it dramatically reduced the cost of gathering information. At the end of the day, whether you are talking to your analyst at Stein Roe or simply reading something on the Internet, it's the guy at the end of the pipe making an intelligent judgment that still is crucial, and all we were able to do was take advantage of the fact that we could apply our judgment, which we thought was good, without having to spend quite as much money.
What is the investment industry's No. 1 issue? The biggest issue that I think is distorting the market right now is that we are in a period of administered interest rates. The problem with that is that the price system is not being allowed to function and it's giving off distortions. So I fear if that goes on for a while, you are going to get misallocations of capital. I fear that there is a lack of appreciation … the only ways out of this trick box … the only ways out of a deleveraging cycle are two things. One is time. It takes time just for it to go by. And the second thing is policies that promote growth because ultimately, real growth is the only way out of the trick box. So anybody that proposes something that will lead to sustainable growth is something that I am in favor of. But growth that is short-term oriented or that is government driven is more likely than not to fail.
What is the one thing that keeps you up at night? There are so many things that keep me worrying at night. I think because we are in a period of a downturn, democracies don't do austerity well and I'm afraid that you have politicians who have, on both sides of the aisle, short-term goals and aspirations, trying to resolve a problem that needs long-term solutions and I don't think they've got the patience for that. I think that's going on globally. I think as a consequence, what the equity risk premium ought to be may be much higher than we think short term … My opinion is the next three to five years, it's going to be a hand-to-hand struggle to earn solid returns. The next 10 years, I'm quite confident that those 5% real returns are out there because I think two things will have happened. One, we will have worked through the deleveraging cycle and second, the next big thing will have come down the pipeline. I don't know what the next big thing is … and that will be where the winning investments will come from. That will be the equivalent of finding Levi Strauss selling blue jeans to the gold miners. I don't want to own the gold miners, I want to invest with Levi Strauss. That will be the next fun thing, figuring out when the next big cycle is coming and how to exploit it, and in the interim, how do we make sure we keep client capital intact before that day?
What is the biggest concern facing money managers? If you exclude complete social unrest to the point where financial assets are kind of irrelevant … the biggest risk is that there may be too many money management firms out there and subpar returns will just drive some people out of the business.
How does SBH compete with the biggest asset managers for institutional clients? It's interesting. For example in 2008, particularly in fixed income … all of the big money management bond firms, all but one, really blew up. Western blew up, Loomis blew up, PIMCO did not, which was a good thing because if everybody had blown up, the consultants could have chalked it up to, “Well, this was a once in a lifetime or century event that nobody could have predicted.” But all these guys were down 25% in an asset that wasn't supposed to go down and PIMCO didn't, so they then had to scramble to say, “What did these guys do right that the others didn't” and client pressure really started to pull money out of the larger, some of those weaker, managers. They started looking around for who the next tier was and they found us. Then in 2009, when we did well again, Loomis came roaring back, all the credit-oriented managers came roaring back, but we did well. too. And at that point, the way we were positioning ourselves was, “We're not PIMCO, we're not trying to be PIMCO,” … but view us as a complement to PIMCO or view us a complement to one of these guys because what we can do, they can't. There's lots they can do that we can't, but there are some things we can do really well that they can't, and that resonated with a number of consultants and that in turn, built a momentum. The numbers kept up and that's continued ... And those same consultants, because now we have finally hit their radar in terms of fixed income, then also began to look at our equity results. Then the equity results started to pick up as well. So that's why I say we're at a point right now where if we can just keep the flywheel going, we should have all the opportunities we need.
What's next for the firm? In the short run, it's a very easy one – don't (mess) it up. In the long run, we need to be thinking about two things. We need to be thinking about an additional channel of distribution, which would be something like mutual funds. We don't have commingled vehicles to offer to our clients and we need them. They're expensive to start up, and until you get a critical mass, it's an expensive proposition, so we're looking at it carefully.
The second one that is more important is we need to figure out how to provide our clients with some kind of international exposure. Our focus is largely domestic and we are clearly in a global economy. I will be the first one to tell you that I am not going to be the one to identify who the best consumer products company in Brazil is, but I know there are people out there who can.