The Trouble with Investment Management Consultants

I have been on both sides of the table in equity money management.  I have hired and fired managers.  Now I am looking to be hired as a manager, and I face something that distresses me — the consultants that advise potential clients.  Personally, I think the consultants could do a lot better if they abandoned their overly simplistic model that categorizes managers on capitalization, value/core/growth, and domestic/international.  It does not serve their clients well — I believe the most fundamental risk model in a globally connected world considers industry exposures, and ignores other variables.

Why?  Industries tend to occupy specific areas of the “style box.”  At one firm that I worked at, external consultants complained that our risk control procedures were nonstandard, because they were focused on industries and sub-industries.  I counter-argued that our methods were better, because with a given industry, there was little variation in market capitalization and value/growth, but industry performance varied considerably.  Though I am no longer with the firm, it continues to do well, while many that used the consultants’ model have died.

Look at it another way. Isn’t investng about finding attractive opportunities, regardless of how big they are, where they are located, or how quickly they grow?  I think so, as does Buffett, Munger, Muhlenkamp, Heebner, Hodges, Rodriguez, Lynch, and many other successful fundamental investors.

Sometimes largecap names are attractive, sometimes smallcap.  Sometimes deep value is attractive, sometimes growth at a reasonable price.  Good managers analyze where the best value is, regardless of non-economic factors.

But if you have to cram me into the style box, fine, I am a midcap value manager that buys a few foreign stocks.  But there is a huge loss in constraining intelligent investors through the style box.  The better a manager is, the more one should ignore non-economic distinctions, and let him perform.