Name it, and Margaret Towle's done it - at least in alternative investments. Towle entered the fledging space in the early 1980s, when few knew what a "hedge fund" really was. She's taken leadership roles in research, product development and investing on both the institutional and retail sides of the business.
She's the former chief investment officer of Northern Trust Global Advisors, where she helped launch the firm's alternative investment business and oversaw the firm's asset allocation process. She also served as the chief executive officer and chief investment officer of Puget Sound Asset Management Co., a mutual fund company specializing in alternative investments. Towle, CPWA(SM), currently serves on the board of directors for the Investment Management Consultants Association. And did we mention her Ph.D.?
After taking some time away from the business to go to film school and travel internationally (which included a pleasant lunch with Fidel Castro) she now heads the Portland, Ore.-office of Greycourt & Co, Inc., a financial advisory firm that caters to extremely high net worth clients. Towle sat down with Boomer Market Advisor for a frank discussion about alternative investments, client apprehension, baby boomer retirement and much, much more.
Boomer Market Advisor: When you started out in the early 1980s, did anyone even know what alternative investments were?
Margaret Towle: After I did the academic thing I started at what is now Russell Investments. At that time nobody even knew what they were. I made it a point to meet with hedge fund and private equity managers that came to the office. One of the hedge fund managers opened an office in Sun Valley, Idaho. I thought that sounded pretty good so I left Russell to join. There were maybe only a handful of so-called hedge funds at the time. It was really an unknown space.
BMA: We assume it was super-exclusive?
MT: It was ultra-exclusive, really just for the high net worth and purely through word of mouth. And it was innovative that this group was approaching institutions at that time. So that environment was so very different from today in terms of purely looking at capturing inefficiencies and not so concerned about how much money you make.
I then joined the sell side. I think that my approach to this space is different because of my academic background, but it was pretty easy to figure out exactly what people were looking for in companies and from the investment criteria that would meet their expectations. I remember telling a friend that I was going to the sell side and he said, "Well, are you prepared to lie, cheat and steal?" Not that I think that the Street, but it's a very big difference from the consulting or advisor side.
BMA: You said it gave you a great perspective in knowing what people are looking for in companies and investment criteria. How specifically did it help you?
MT: In all the years that I've looked at alternative investments and traditional investments I've seen there's a lot of different ways to make money. You really have to be disciplined in whatever you decide. So whether you're a trader or an equity long/short manager, or even a private equity manager, the idea is to understand the investment process and then follow it. If you look at a growth guy, you know he's looking for revenue growth. He could care less about book value or cash flow or anything like that.
I eventually hooked back up with one of my partners from Sun Valley around 1998 and we had the concept for creating a registered investment company that dealt exclusively in alternative investments.
BMA: We all know what happened around that time with Long Term Capital. How did that affect your plans?
MT: This was actually before Long Term Capital. Ironically, when we first launched, most people were saying, "Why would I want to go into alternative investments and an absolute return strategy when I can get 30 percent or more with my equity manager?" So that was actually a bigger challenge than overcoming Long Term Capital. I've always believed that alternative investments were a bit misunderstood and that's one of the reasons why I had an interest in them. Not just for the return but for the diversification effect.
For the readers of your magazine, people in this environment are looking at ways that they can preserve capital and retain absolute return. If you go back to hedge funds, that's really where it all started.
BMA: We've heard so much about the unwinding of quantitative strategies and its effect on hedge funds. How are you affected by it?
MT: Everybody is affected by what's going on now in the hedge fund space, but we use really a variety of different strategies. We primarily use fund-of-fund strategies and some include quant strategies. The industry has been through a lot in the last six months. I think part of it has been that historically, hedge funds focused on networks and pedigree and who you know. Less emphasis was on the business side, portfolio construction and these kinds of issues. The unwinding of quantitative strategies is having a market impact, but as far as an industry impact I think the whole business model is changing for alternative investments.
BMA: So you're saying that Madoff has helped you?
MT: In a way Madoff has helped. It certainly is very unfortunate that people were affected by him, even firms that you wouldn't expect to be affected.
BMA: But it's a return to fundamentals?
MT: It's not only a return to fundamentals, it's recognizing that just because you know somebody personally, that isn't necessarily everything on your due diligence checklist. What I've seen in the last year or so is a greater emphasis on operational due diligence.
BMA: One of the rubs against fund-of-funds in a bull market is that because they're so diversified it's tough to get the alpha. Is that true, and if it is, wouldn't that then translate to a bear market protection?
MT: I think it's unwise to make a generalization about fund-of-funds because there are so many different kinds. What I'm seeing now is an evolving emphasis on distinguishing among fund-of-funds; you can't just put them all in the same bag. The other thing that makes sense is a risk-aware culture in fund-of-funds. People are looking at fund-of-funds' exposures to risk; factor exposures versus a fund-of-funds that is simply looking at a manager's strategy.
BMA: How is Greycourt holding up given all that's happening in the market?
MT: Greycourt as a firm is doing well because our client base is one that is thankful for our advice and generally listens to us. They're what you might call the ultra-high net worth. They're very successful in their own right, whether it's running a retail operation or real estate, or whatever it is that allowed them to make their wealth. The difference I found in working with institutional clients versus individual clients is that so-called institutional gatekeepers are more interested in career advancement than advancing the needs of pensioners. When you're working with high-net-worth clients they're interested in your advice. They question your advice but they do it in a collaborative way.
BMA: You took a sabbatical from the hedge fund industry because you were upset with how some of the hedge fund managers were behaving. What upset you and why did you come back?
MT: I felt that hedge fund managers were more interested in making money for themselves than for their clients. So I went to the film school in Seattle. I'm currently working on a documentary now on autism and then a screen play about a hedge fund manager.
The avocation I've always had is working in the alternative space with women, but not necessarily as part of what I've done with my job. Several years ago I was part of a private equity group called Capital Circle that made private equity investments in women-led and women-owned businesses. Unfortunately, there weren't enough businesses at that time that we could fund.
I was a Kauffman Fellow at the Center for Entrepreneurial Leadership and got a real chance to see how entrepreneurs think and act. I think women entrepreneurs, unfortunately, actually think too small, in terms of capital funding. I was also the founding member of a group called Center for Women and Democracy and we networked with women throughout the world developing business relationships and private investments and so forth. We actually went to Cuba and I had a one-on-one with Fidel Castro. We spent an entire afternoon with him. He was fascinated with investments. He gave us an opportunity to meet with his minister of finance and talk about investment opportunities in Cuba.
And here is a guy who has been touted as anti-capitalist and was fascinated by capitalist kind of activities.
BMA: So why Greycourt?
MT: I had taken that little hiatus and was ready to come back. I was really looking for a firm that would fit my needs and Greycourt fit the bill.
BMA: What are some of the highly touted alternative investment products and strategies that have held up and some that have not?
MT: If you're looking at skill-based strategies, you're betting on the ability of an individual to really process a lot of information and think outside the box. So there are a few strategies that have held up well.
One would be the macro even though they've gone through ups and downs; But that conceptual thinker, able to think thematically and so forth. I think the other aspect of that is a manager's flexibility and their ability to be dynamic. For example, you'd think that some of the managers we use in the equity long/short space would be having a difficult time, but they've really been able to navigate these waters pretty well. In periods of turmoil, nothing is going to do well. I mean, everyone has talked about this to death. But I think that those that are fundamentally driven are going to do better in the long term than those that are just following the trend.
BMA: I would assume with the average net worth of your clients that they're not as concerned as other baby boomers as they approach retirement. Am I correct in making that somewhat obvious observation?
MT: You know what's funny? The average net worth of our clients is over $100 million. They've worked hard to make their money and while they're not worried about retirement, they certainly don't like to lose money. So from a behavioral approach to looking at clients, I don't think that the asset size really changes things. Whether somebody's net worth is $10 million or $1 billion, if you're down 30 percent, you're down 30 percent.
BMA: Sure. So that would mean that a lot of counseling skills are coming into play at this point?
MT: I think counseling skills always come into play when dealing with clients. But I do have a special interest in the whole behavioral theory approach. And I think that advisors now are learning that they may be right in the tools that they use in the asset allocation and so forth, but if they can't communicate that to their clients in a way that the clients understand or if the client becomes too emotional about it it's not going to help. And so things like loss aversion and your most recent experience being the one you remember, those are all going to help you in dealing with clients, especially in this environment.