Investment leadership and portfolio management

www.ebook3000.com www.ebook3000.com Investment Leadership and Portfolio Management www.ebook3000.com Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more For a list of available titles, visit our Web site at www.WileyFinance.com www.ebook3000.com Investment Leadership and Portfolio Management The Path to Successful Stewardship for Investment Firms BRIAN SINGER GREG FEDORINCHIK BARRY MANDINACH John Wiley & Sons, Inc www.ebook3000.com Copyright C 2010 by Brian Singer, Greg Fedorinchik, and Barry Mandinach All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (976) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Singer, Brian, 1960– Investment leadership and portfolio management : the path to successful stewardship for investment firms / Brian Singer, Greg Fedorinchik, Barry Mandinach p cm – (Wiley finance series) Includes bibliographical references and index ISBN 978-0-470-43540-3 (cloth) Portfolio management Investments I Fedorinchik, Greg, 1970II Mandinach, Barry, 1956- III Title HG4529.5.S556 2009 332.6–dc22 2009020140 Printed in the United States of America 10 www.ebook3000.com Contents Preface xi Acknowledgments xvii CHAPTER Characteristics of Successful Asset Management Firms You Can Take the Boy Out of the Culture, but You Can’t Take the Culture Out of the Boy Size Matters, but Not in the Way Most People Believe Governance: The Guardian of an Investment-Driven Firm Fostering Collaborative Freedom: Everybody is a Peer Integrity: An Unquestionable Characteristic of Success Conclusion CHAPTER Building a Cathedral: A Framework for Turning the Mission into Collective Action A Framework for Effective Leadership and Management Establishing and Living Organizational Values Creating Mission and/or Investment Philosophy Statements Strategic Goals and Key Performance Indicators Conclusion CHAPTER Building a Meritocracy: Understanding, Evaluating, and Rewarding Employee Contributions Performance: A Deeper Dive Horizon: The Fallacy of the Three-Year Track Record Performance Analysis: Practically Speaking 12 19 23 25 27 28 29 31 33 37 39 39 40 45 v www.ebook3000.com vi CONTENTS Top-down and Bottom-up Approach to Determining Performance Designing Your Rating System to Help Make the Difficult Decisions What Does the Performance Score Really Mean? Criticality: A Deeper Dive Merit Zones: Putting It All Together Communication of Performance and Criticality Values and Compensation Conclusion CHAPTER Investment Philosophy and Process: A Lofty Cathedral Needs a Deep Foundation The Importance of Investment Philosophy and Process in Investment Organizations Investment Philosophy: Core Beliefs Investment Process: Control and Anarchy Avoiding the Pitfalls of Behavioral Biases Conclusion CHAPTER Investment Process in an Evolving World Implementation Overview: The “How” of the Investment Process Fundamental Valuation Market Behavior and How It Challenges the Fundamental Investor Team Behavior: Lessons for the CIO from Jelly Beans and Freud Portfolio Design Conclusion CHAPTER Communication for Superior Client Outcomes The Problem: Human Nature A Classic Tale Case 1: Individual Investors, the Impact of Performance Chasing Case 2: Are Institutional Investors the “Smart Money?” The Reality of Investing in Equities The Mathematics of Recovery www.ebook3000.com 48 51 53 53 57 59 64 67 69 69 70 73 78 83 85 86 88 90 118 127 129 131 133 134 137 137 139 142 vii Contents Dilemma: Investment Firm or Distribution Shop? The Importance of Culture Sales and Marketing in an Investment Firm Conclusion Appendix: Client Communication in Extreme Market Conditions CHAPTER Where are the Clients’ Yachts?: Reasonable Fee Structures The “Gamma Trade” Anatomy of a Blowup Catch 22 Faults of Existing Fee Structures Our Recommendation: High Integrity Fee Structures Conclusion CHAPTER Final Thoughts 143 145 146 149 149 159 161 167 168 170 178 186 187 Characteristics of Great Asset Management Firms It Starts with a Shared Mission and Values True Meritocracy Avoiding the Pitfalls For Successful Client Outcomes: Communicate, Communicate, Communicate It’s All about Incentives Integrity 188 188 189 190 192 193 193 Notes 195 Bibliography 201 About the Authors 205 Index 207 www.ebook3000.com www.ebook3000.com ... the leadership is doing its job T 27 28 INVESTMENT LEADERSHIP & PORTFOLIO MANAGEMENT A FRAMEWORK FOR EFFECTIVE LEADERSHIP AND MANAGEMENT Table 2.1 outlines a basic framework for effecting leadership. .. not an 10 INVESTMENT LEADERSHIP & PORTFOLIO MANAGEMENT Investment Man Hours per Annum 300 250 200 150 100 50 0 10 Number of Investment Managers 12 14 FIGURE 1.2 Application to Investment Management. .. Framework for Effective Leadership and Management Establishing and Living Organizational Values Creating Mission and/ or Investment Philosophy Statements Strategic Goals and Key Performance Indicators