The Crusade

Crusades have always represented a series of campaigns against external and internal opponents. For the last couple of years, my firm has been preaching a relevant investing crusade.

To be sure, there are many internal and external opponents to this message. There are many parties that draw their value from the continuation of asset allocation, diversification and dollar cost averaging. From style boxes, to market benchmarking and mean-variance optimization, the momentum is on the side of the traditionalist.

We at Atlantic Advisors have seen quite enough of the damage that this approach has allowed with investors over the last ten years. Bennet began his first investment firm (Sedacca Capital Management) in 1997, while I began my role of managing the investment group for Adventist Health System in 1998.

Separated by about 6 city blocks in Winter Park, and quite independently in thought, we each pursued the twin goals of capital preservation and fitting portfolios to the specific needs of our clients. It was each our realization that “beating the benchmark” is not a goal that any client desires. We each saw that undefined downside risk is untenable to any investor, and that managing to a client’s goal instead of mindlessly rebalancing back to the 60%/40% ideal was the only way to achieve success for our investors. And so we joined forces in 2007 and made each other better in the process.

Releasing Responsibility

All of these conventional tools for managing portfolios (efficient frontiers, asset allocation, diversification, etc.) seemed to rise out of the abdication of responsibility to the client, and a desire to categorize and simplify the “job” of investing.

In the early days of investing, professionals were employed to make the best possible decisions for the investors. Compensation for investment professionals was based on the continuation of success at achieving these goals. Investment managers that did not achieve, did not survive.

However, as corporations began to realize that this was a serious responsibility, and could be quite costly if they didn’t achieve success, there was a move from pensions (where the benefits promised were defined as a function of your work history, salary, seniority, etc.) to 401ks (where you would receive whatever was left over after you applied your own “expertise”).

Good luck to all of you non-investment people - we hope it works out for you. But be glad you have the freedom of choice!

I remember my early working days at Putnam Investments on the municipal-bond trading desk. It was around 1990 that they began to realize that they were not paid to make money for clients; they were paid to manage money for clients.

So instead of paying portfolio managers bonuses for good returns, they managed portfolios by committee and spent resources hiring a horde of marketing folks. If we could just be a little better than averages, then the Hermes tie wearing hordes with glossy marketing materials could invoke the historical references to Judge Samuel Putnam and the Prudent Man Rule.

This isn’t just conjecture, or sour grapes. One of my early jobs was to make us average, in a way, and then to let my superiors help us get above the median line with their management committees. In order to manage to the median, we needed to know what our competitors were doing. In municipal fixed income portfolios, this meant finding a way to divine the duration exposure of each competitor.

So, before the days of the Internet (was it really that recently?), we had to find a way to get this information. So we pulled out our Lotus 1-2-3 spreadsheet program (man, this story is making me feel old) and our daily copy of the Wall Street Journal. Each day we would add a column with the latest Net Asset Value changes for each competitor, and then plot it against the change in the municipal yield curve. Doing this each day, we began to gain a view of what our competitors were doing, and we found our place to hide right in the middle of the pack, or hopefully just ahead of it.