The annual Morningstar Conference opened June 28th in Chicago with a record number of attendees primed to hear about strategies for investing in funds, stocks and other asset classes over the three-day event. Morningstar’s Don Phillips introduced the keynote speaker, Michael Mauboussin, chief investment strategist at Legg Mason Capital Management.
Managing Director Don Phillips opened the firm’s annual investment conference with a vignette about Legg Mason: when he traveled around during Morningstar’s road show before the company went public, he says they visited a lot of investment companies and they all asked the same sort of questions about earnings and projected growth of the business but when they got to Legg Mason, Phillips says, the questions were completely different: What have you been reading lately, have you heard any interesting new investment ideas? Legg Mason’s point of view, Phillips said, was totally unlike that of the other firms’. Legg Mason Capital Management is pulling a lot of interesting talent together, Phillips noted as he introduced “one of the stars” at Legg Mason, the firm’s Chief Investment Strategist, Michael Mauboussin.
Mauboussin, who is as well an adjunct professor of finance at Columbia and author of the book “More Than You Know: Finding Financial Wisdom in Unconventional Places“, (Columbia University Press, 2006), kicked off the conference with a talk about Long Term Investing in a Short Term World. He spoke about the short-term thinking that some incentives can lead to. For example, he says that CEO compensation is much more tied up in the stock market than it used to be just 20 years ago: in 1985, 1% of the average CEO’s compensation was tied to the stock market, while in 2006, 60% of it was. That can lead to short-term thinking with a focus on share-price growth. “It’s very possible to create higher stock prices without creating shareholder value,” argues Mauboussin. The short-term incentive can lead to short-term thinking.
In funds, incentives may also lead to short-term thinking or what he called a “sub-optimal social context,” and says that firm culture is a very important factor in fund performance. If you have a fund company that is culturally focused on the business of gathering assets and distribution and another one that is focused on the profession of delivering superior performance, via long term, contrarian thinking, and patience, guess whose performance is better over the long term? That’s right-the long-term thinkers focused on the profession. Mauboussin says other factors come into play as well: “low turnover” is very important, as are investment concentration, investment style (intrinsic value orientation, not momentum) and, surprisingly, geographic location. Mauboussin says firms based in places like Salt Lake City or Omaha do better than many places where there are higher concentrations of investment companies-why? “The noise factor in the financial corridor,” he explains.