I don’t usually write about mutual funds. My now ex-wife was/is a partner at Thornburg Funds, and it didn’t seem fair to expect people to believe I’d be objective. But now that we’re divorced, the handcuffs are off (I’ll try not to be swayed the other way, either). This is a good thing, because in this economic environment, it’s hard not to talk about investment portfolios in general and mutual funds in particular.
Most of the advisors I know are doing a lot of soul searching about their investment strategies these days, and it’s not hard to guess why. When all your “well-diversified, uncorrelated” asset classes drop at one time, and client portfolios lose half their value, it has to leave you scratching your head, wondering if a buy-and-hold, value/growth, large cap/small cap/international, and bond fund allocation is really the prudent approach.
I believe much of the blame lies with Paul Volcker, the Federal Reserve chairman in the early 1980s, who engineered the low interest rate, low inflation, low tax environment that spawned the Reagan/Bush/Clinton/Bush II 27-year bull market. Sure, we saw some major hiccups in ’87, ’91, and ’01, but each time the old Bull just came roaring back stronger than ever, creating the impression that equities really only go up, and the job of an investment manager or financial advisor is simply to identify which classes of equities are currently going up the fastest.
The lesson of the Mortgage Meltdown of 2008 may well be to remind us that there are other possible economic environments that require different investment strategies. When I started covering financial services in the early ’80s you couldn’t give away a stock or bond mutual fund and a “well allocated” portfolio contained real estate, oil & gas, and gold. Today, with President Obama, Nancy Pelosi, and Harry Reid in charge, together seemingly intent on exploding the Federal budget deficit and raising taxes, it’s at least likely that we’re headed for an economic environment more like the Carter years than the golden age of the last quarter century.
As far as I can tell, all this has advisors more willing than ever to look beyond the boundaries of Modern Portfolio Theory, exploring areas that only a year ago would have been unthinkable, including asset classes and strategies not taken seriously since the Dow last stood under 1,000: Commodities, real estate, short selling, and even strategic and/or tactical asset allocation. However, if you’re not yet ready to embrace the strategy-formerly-known-as-market timing or feel you have to hang in there with equities so your clients won’t be on the sidelines for the eventual recovery, we’ll be seeing a growing number of solutions offering to help keep the costs of investment management more in line with your new revenue levels. Case in point: I had a conversation with an accountant and doctor the other day that made me think: “These guys are at exactly the right place at the right time.”
The Accountant & the Doctor
Okay, to be fair, the accountant was Bill Quinn, who started his career at Arthur Young & Co. in 1969 and is now chairman and chief investment officer of American Beacon Advisors, which he founded. Among his many credits, Bill is the chair of CIEBA, a group of the country’s largest pension funds, and is on the NYSE Pension Managers Advisory Committee.
The “doctor” is Kneeland Youngblood, who, in addition to having an MD from the University of Texas, is the former CEO of American Beacon Advisors, and now co-founder and managing partner of Pharos Capital Group, the private equity firm that bought the $65 billion AUM American Beacon from American Airlines.
These guys are big-time institutional managers, with careers built on overseeing one of the largest pension funds in America. Now, they’re making a big push to move into the independent advisor market, with eight equity funds, three index funds, five bond funds, and two money market funds.