NEW YORK - Whether big or small, market mavericks or believers in benchmarks, the chief investment officers of top-performing mutual funds share some common elements - including a strong sense of who they are, a good understanding of where they came from and perhaps, most importantly, a trained focus on where they want to be.
And it shows.
"You want to invest to your conviction, and you want to make sure your portfolio reflects that conviction," said Mark Jordahl, chief investment officer for U.S. Bancorp's First American Funds in Milwaukee.
It may sound like Investment Management 101, but when applied with strict discipline, it's a strategy that consistently delivers, a group of four chief investment officers told mutual fund colleagues during a roundtable discussion at the fourth annual Lipper Fund Classification Awards last week.
These guys should know. All four represent funds recognized by Lipper for outstanding performance among their peers this year.
But that's not to say each has the same approach. Take how investment officers view benchmarks, for example.
"We have six teams, and you'd probably get a different answer from each of them," said Jerry Webman, senior investment officer and director of fixed income for New York-based OppenheimerFunds. Some use their fund's benchmark to monitor volatility, others might develop a careful mathematic calculation within the benchmark to position themselves - and some ignore it altogether, he said.
"We prefer not to be a koala bear, hugging the benchmark, but a grizzly bear," said Frank Holmes, chief executive and chief investment officer of U.S. Global Investors in San Antonio, Texas. That doesn't mean the company tracks benchmarks obsessively. Instead, the goal is to perform just better than 50% of his funds' peers "every month, every quarter," Holmes said.
The key, he emphasized, is consistency. "You never strive to be No. 1. You take too many risks that way," he said. To underscore this belief, bonuses are awarded monthly and are cumulative, with the largest award gong to the team that can perform at 50%-plus every month of every quarter for three years.
Jordahl said he and his team want to beat the benchmark, but they also use it as a tool to track U.S. Bancorp's own performance.
Chief investment officers also have mixed feelings about program trading, whereby computers drive investment decisions.
Paul Hondros, chief executive officer of Gartmore in Conshohocken, Pa., said that program trading has helped Gartmore's funds grow quickly, especially in the United States, which represents $45 billion of the funds' total $80 billion under management. Gartmore modeled its philosophy after companies like Oppenheimer and Putman Investments, he said. Still, he noted, it's the fund company employees who make the decisions about how much to rely on these measures, and, ultimately who are responsible for the results.
"Talent is a necessary ingredient," Hondros said. "At the end of the day, someone pulls the trigger, and someone is accountable," he said.
At First American, program trading accounts for "a sizeable block" of trading, Jordahl said.
But Holmes is not taken in by computer models. "Everyone is running around with quadratics," he said. "The magic is to stay away from the trend." After all, he noted, 65% of all trading at Goldman Sachs is proprietary.
Traders, furthermore, need to be held accountable for the performance, and the rewards, of a mutual fund, Holmes said. It's a disservice to the product to build barriers between traders and the rest of the fund's operation, he said. That's why part of the profits at U.S. Global goes to the trading desk. "It's a measure so that everyone participates," he said. It also ensures that fund performance, not just commissions, motivates traders.
Jordahl also emphasized the importance of understanding the role of traders. "It's like anything else," he said. "You have to measure it to know how good you are," he said.
The chief investment officers agreed on other points, too. For example, a number of them said, "convergence" is the word for the future. Mutual and hedge fund strategies will continue to converge, Webman said, as will regulations between different countries as investment management becomes increasingly global.
One good example is the possible merger of the New York Stock Exchange with exchanges in London or Berlin. "Regulatory agencies around the world will develop common features," predicted Webman, who views uniformity as a positive development. "It will be easier for us to know what we need to do."
Another thing the CIOs agree on is that as investment management continues to undergo changing trends, Firms need to continuously examine their internal operations and portfolio managers need to be able to explain and even defend the decisions they make. Jordahl, for example, asks for a memo each week from fund managers in which they explain investment decisions and defend their style consistency.
Holmes said that managers at U.S. Global Investors write a weekly letter to shareholders in which they identify the three major market forces for the period and describe how those forces influenced their portfolio's performance and their decisions about its composition.
In addition, he requires the investment team to follow a weekly regimen beginning with a discussion of macroeconomic developments on Mondays. Those talks guide portfolio managers' stock picks throughout the week. Then, on Fridays, the team studies and ranks currencies and various other worldwide measurements to evaluate their own decisions and to provide fodder for the following week's macro-level discussion.
The exercise is to get employees to examine their role from different angles and to avoid falling into a rut. "There is a great disconnect among smart people when you move from micro to macro to micro," he said. "You have to change the model and contextualize the issue," he said.
Whatever the strategy, it's the discipline that will attract investors, Hondros said, and that is something upon which everyone agreed. "People select you for the quality of your process and the quality of your people," he said.
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