{"id":5464,"date":"2016-03-29T10:10:57","date_gmt":"2016-03-29T14:10:57","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5464"},"modified":"2018-09-21T02:03:35","modified_gmt":"2018-09-21T06:03:35","slug":"alpha-wounds-culture-vs-philosophy-mismatch","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2016\/03\/29\/alpha-wounds-culture-vs-philosophy-mismatch\/","title":{"rendered":"Alpha Wounds: Culture vs. Philosophy Mismatch"},"content":{"rendered":"

My entire series on Alpha Wounds<\/a> is intended to provide solutions that can be implemented by anyone in the investment community to improve the returns of active investment managers for the benefit of clients. This month\u2019s post focuses on choices over which the investment adviser has nearly full control. Specifically, I am talking about matching the culture of an investment management firm with its underlying investment philosophy. When culture runs counter\u00a0to philosophy, even excellent fund managers are not allowed to fully execute their investment philosophies.<\/span><\/p>\n

From Germination to Revelation<\/strong><\/span><\/p>\n

The genesis\u00a0of this understanding came to me during a 2013 presentation by a fund manager who was at one point anointed \u201cFund Manager of the Decade\u201d by Morningstar. I was all ears as I listened to him describe his ways and means of delivering outsized results. I am paraphrasing, but he said, \u201cI wake up very early and digest the news from many different news sites. I check my e-mail for news alerts about the companies we own in the portfolio. I read the regulatory releases of each firm front cover to back cover. I conduct financial statement analysis and build discounted cash flow valuation models. I interview management and conduct on-site research as well as my own independent research.\u201d And so on.<\/span><\/p>\n

Notice something here? First, I have a sneaking suspicion that many investment managers do not do all of the above. But second \u2014 and surprisingly \u2014 there is nothing secret about the Fund Manager of the Decade\u2019s process. In fact, if I asked each of you the cold question, “Describe to me the process of a classic value manager?” you would likely give me the same answer.<\/span><\/p>\n

As I was listening to this fund manager, it occurred to me that, based on my own experience, a gigantic difference maker for me and my performance was having a firm culture that supported the investment philosophy. Here I am referring to the difficulty of implementing and executing an investment philosophy that is strongly in accord with the minds of its practitioners and is supported by value-added tools. When I asked the Fund Manager of the Decade about these things, he said, \u201cOh my God, that\u2019s everything.\u201d<\/span><\/p>\n

Marketing the Philosophy<\/strong><\/span><\/p>\n

If members of the firm\u2019s marketing department are\u00a0compensated by commissions, then they also are incentivized to earn the next dollar of assets under management (AUM) without respect to whether that new customer fully supports the underlying investment philosophy. If the marketing department is working with wirehouses primarily, then, yes, you get scale in your AUM, but you get very little chance of ensuring the end investor trusts the investment managers to execute their philosophy over time. In the long run, this means that if the investment environment cuts against the grain of the philosophy, assets under management leave just as quickly as they came. In many cases, the aggrieved customer never comes back, or it is many years until they are open to the fund manager again.<\/span><\/p>\n

What I propose as a solution is that wholesalers and other marketers of an investment firm\u2019s products:<\/span><\/p>\n