Behavior and Performance
Late 2008 and early 2009 were a traumatic time in the market - a time when investors both individual and institutional were put to the test. And, as is the case with testing - the tougher the test the more revealing the results. In this case, the test was extremely difficult - but for better or worse, the results were crystal clear.
While retail clients can be forgiven for fear-driven behavior of "going to cash" with their life savings during volatile times - it's not forgivable for a professional manager to change his investment discipline which others rely on - especially when an objective, cool hand is needed during market volatility.
However, this is exactly what occurred. Not only did the manager become significantly more conservative in their stock picking during this time frame, but they also did something which I never imagined - they required new allocations for many clients to reduce their risk exposure. While this decision on the part of the manager was borne of self-preservation, it was unforgiveable to change risk exposures for clients which were agreed upon when minds were clearer. It was market timing - pure and simple. Despite my protests, these changes occurred -and ultimately did not play out well for clients when markets bounced back sharply off the bottom. . .
I was disillusioned…
My frustration ultimately led to soul searching: should I just shut up and collect checks from a manager who had violated their discipline and whose literature touted outperformance which was so "historical" that none of my clients had any evidence of it in their portfolios? My desire to provide for my young family made that alternative very attractive to consider. Instead, over a period of months I decided that if I were to stay in the industry, it would require a rigorous search for what investment philosophy had actually done the best over long periods of time, regardless of that destination. The result was humbling…