Pioneer wonders about future with perspective of the past

Richard M. Ennis, the investment consulting pioneer who co-founded the Chicago-based firm that would become industry giant Ennis Knupp & Associates, figures institutional investors globally are having a Wile E. Coyote moment — suspended in midair after chasing Road Runner off a cliff.

The timing of an eventual fall is uncertain, said Mr. Ennis in a recent interview about his memoir — "Never Bullshit the Client" — available this month on Amazon. But "it's implausible that we have asset prices where they are, interest rates where they are, combined with the significant political risk that exists in the world today," he noted.

Mr. Ennis, who retired from investment consulting in 2010, said if he were advising clients today, he'd be telling them — cognizant of the constraints boards of trustees face — to "reduce their equity exposures and their bond durations."

If, instead, he were the sole trustee of an endowment or pension fund, Mr. Ennis said he would be more extreme — selling all stock and reducing the duration of bonds to not more than one or two years, for a very high investment-grade bond portfolio yielding about 2% to 2.5%. Having accomplished that, he said, he would "hang a sign on the door that said 'gone fishing.'"

Mr. Ennis has been fishing — and shooting pool, and ballroom dancing, and studying Buddhism among a host of other activities — for nine years since retiring the day EnnisKnupp was sold to consulting giant Hewitt Associates.

He credits his son, Ryan — a regional director at Dimensional Fund Advisors LP — with convincing him to write his memoir, to meet a "real craving" among younger industry professionals for a "better understanding of how we got to where we are."

Mr. Ennis' own journey was one of twists and turns.

An indifferent high school student more interested in billiards than books, Mr. Ennis said he got serious after three years at Los Angeles Valley College — becoming a dean's list regular at California State University of Northridge, where he completed his undergraduate studies.

His next stint in higher education, as an MBA student at UCLA in the late 1960s, would bring him into contact with academics destined to become giants in the field of portfolio management, including Harry Markowitz, of modern portfolio theory fame, and William Sharpe, best known for his capital asset pricing model.

In a follow-up email exchange, Mr. Ennis cited the fact that public education in California through graduate school was "free or essentially so" as a key to his being able to find his way "from Harry's pool room and a C-plus GPA to Markowitz's classroom in a few short years."

Serendipity played a part as well. The efficient market theory/capital asset pricing model era was dawning at "precisely the right time in my career" — and arguably the right place as well, on a West Coast relatively open to innovation in finance and money management, "to carry me into analytical waters," Mr. Ennis noted.

At UCLA, Mr. Ennis wrote in his book: "I was taken with the idea of understanding investments in a profound way."

His first money management job, with Los Angeles-based Transamerica Fund Management Co., found him doing stock research for a "gunslinger" portfolio manager in the go-go market of the 1960s.

Recounting how he was tasked with writing a report on a company in which his boss had bought shares at a broker's behest, Mr. Ennis said when he called for details, the broker responded: "You want information? I'll give you information. "BUY! BUY! BUY!" and slammed down the phone.

"That's the way it was in those days," he added.

But changes were afoot, and Mr. Ennis — motivated, he said, by intellectual curiosity and a desire to do something in life more meaningful than flog stocks — found himself among the vanguard driving those changes.

In his memoir, Mr. Ennis relates how he came into contact with, and eventually worked alongside, John O'Brien, whom he credits with doing "more than anyone I can think of to introduce modern capital theory to the investment profession," and future Wilshire Associates founder Dennis Tito.

The two were the first to calculate, in a commercial setting, beta coefficients for individual stocks, which opened the door for evaluating a portfolio's risk-adjusted performance. That heralded the start of a new era where investment managers "could observe the level of their portfolios' market-relative risk and degree of diversification," he said.

In 1975, Mr. Ennis and Mr. O'Brien moved to Chicago-based broker A.G. Becker, a market leader — with more than 1,000 clients — in establishing the business of performance evaluation services that those beta coefficients made possible.

Mr. Ennis' mission at Becker was to build what would become other central pillars of the investment consulting business — formalized approaches to helping clients set their investment policy and manager selection capabilities.

Six years later, it would be a potential conflict of interest — when the biggest manager of institutional funds in the world then, Morgan Guaranty, suspended trading with Becker because it felt it wasn't getting enough love from Mr. Ennis' manager research team — that prompted Mr. Ennis and Becker colleague James Knupp to break away and launch their own consulting firm.

That episode made it clear that "if I wanted to keep doing what I was doing in a truly independent, professional environment, I would have to hang out my own shingle somehow," recalled Mr. Ennis.

On Jan. 8, 1981, Ennis, Knupp and Gold Inc. was launched. Mr. Ennis was 36 at the time. (The third partner, Ron Gold, would leave the firm in 1987.)

His memoir relates how over the next 29 years he worked to build the firm, through March 2000, as president, CEO and chairman, and then — after Stephen Cummings took on the president and CEO roles — as chairman and head of the EnnisKnupp investment research committee.

The early years "were difficult," writes Mr. Ennis. "There was no other firm to copy," and "the whole proposition of having an adviser on retainer was novel." The firm pegged its basic fee at $20,000 to $25,000 a year in cash, a challenge at first for many pension fund clients, he said.

As the role of investment consultants gained acceptance, EnnisKnupp's service offerings expanded and retainer fees would climb to levels — at six figures and above — where the firm could be profitable.

When it came to EnnisKnupp's ownership structure, "Jim (Knupp) and I always felt EnnisKnupp should be employee-owned" — a great way to retain key people and preserve the firm's culture," Mr. Ennis said.

But the two-class ownership structure they put in place — with principals having equal stakes in the firm and associates having a tenth of what principals had — ultimately resulted in Mr. Ennis' departure from the firm: In 2010, a majority of its 20 principals and 20 associates agreed to be acquired by Lincolnshire, Ill.-based human resources consulting giant Hewitt Associates which would itself be acquired, a month later, by Chicago-based Aon Corp.

In his memoir, Mr. Ennis concedes, "I really didn't want the firm to cease to be employee-owned. Nor did I like being a bystander while it was auctioned off."

But "with so much money at stake, the principals and associates had to be allowed to vote," he said. And they did — even if many appear to have mixed feelings to this day about the outcome, he said.

A private partnership like the EnnisKnupp of old — which boasted roughly $2 trillion of assets under advisements when it was acquired by Hewitt — could still be viable today, Mr. Ennis insisted. Boards of trustees for public funds continue to need objective advice, and EnnisKnupp's margins were "very satisfactory, he said.

But make that same business a cog in a big financial conglomerate with a $50 billion market cap and a 30 times price-earnings multiple it's trying to maintain, and suddenly "selling advice at $500 an hour to pension funds to put their money in index funds isn't going to help," he said.

Meanwhile, in the nine years since he retired, almost every big investment consulting firm has entered or ramped up discretionary consulting — or outsourced chief investment officer — businesses, garnering relatively healthy fees as a percentage of assets managed for clients in funds-of-funds structures.

While that's not necessarily problematic if consultants don't have a financial stake in the fund-of-funds vehicles being used, it inevitably makes the challenges of putting retainer clients' interest first more complicated, he said.

Having got "sucked back into" the world of grappling with the issues facing big public pension funds in preparing to write his memoir, Mr. Ennis admitted to feeling a bit like Rip Van Winkle.

Still, some things haven't changed, he said.

For example, from the start, Ennis Knupp emphasized passive, low-cost investments over active strategies and "nothing has happened over the last 10 years that would alter that advice," said Mr. Ennis.

The one big active opportunity now is to "stop being fully invested on a non-economic basis," in light of current valuations, said Mr. Ennis.

In the runup to the global financial crisis, Mr. Ennis said he began to push to incorporate a valuation factor — "whether or not you believe P/E multiples are going to stay the same" — into EnnisKnupp's asset allocation modeling, analytics and capital market assumptions. But ideas like that take a long time to percolate and the firm never got to the point of doing so, he said.

"We have become acclimated or accustomed to simply accepting, as institutional investors, market valuation levels," he noted.

"I can't imagine the future. It's just that the present doesn't make a lot of sense," he said in the interview.