Managing expectations as well as money – with Ted Seides
The key for managers looking to keep clients ‘in the game’ with them and so give all parties the best chance of investment success is consistent communication, according to our latest podcast guest, Ted Seides
A common refrain, here on The Value Perspective – indeed, it is how we recently signed off Stepping up to the plate – is there is now close to 150 years of historical data that shows value investing will, on average and over time, yield above-average returns. When we type “over time”, we see it as short-hand for “preferably 10 years but, at the very least, three to five” yet we know, for many investors, that is easier said than done.
There is a lively debate to be had about whether private or professional investors operate with a shorter investment horizon these days. Less in doubt, however, is that, when he began his career in 1992, working to keep his clients alongside him and ‘in the game’ was not a major concern for our latest podcast guest – investor, author and financial podcast host par excellence, Ted Seides.
That is because, as a Yale undergraduate, he joined that university’s investment office under the tutelage of the great David Swensen – and, as you might expect with a $30bn (£23.4bn) fund that can trace its roots back to 1718 and Elihu Yale’s initial endowment of £562, investing for the long term is very much baked into the thinking of both the investment team and its client.
Seides went on to run a successful multi-billion-dollar investment firm, has written two books and now hosts one of the world’s most listened-to financial podcasts, Capital Allocators, where he talks to top investors about their strategies and processes. How, then, would he suggest professional fund managers keep their clients ‘in the game’ with them and so give all parties the best chance of investment success?
‘Layers of confusion’
In general terms, Seides observes, the closer an investment manager is to owning the capital they are allocating, the fewer “layers of confusing decision-makers” they will encounter along the way. “We have spent this whole podcast talking about how to make good decisions in conditions of uncertainty – and how hard that can be,” he continues.
“Well, imagine you are a money manager – you have a client, that client has a consultant, the consultant goes to an investment committee, the investment committee reports to a board and by the time you are at the board, which is filled with a very well-meaning fireman, a teacher who does not really understand what a stock is and so on, what are the chances they are going to make a thoughtful decision?
“In particular, what are the chances they are going to make a thoughtful decision when you have been underperforming for a short period of time? The closer someone is to actually owning the capital, the better chance they have of making, let’s call it, a rational decision. That does not mean it is necessarily going to work out – but a rational decision nonetheless.
“Now, an endowment or a foundation is generally one pool of capital and the investment office is one team and yet, even in that decision-making unit, often the chief investment officer has to report to a committee. And sometimes that committee is very opaque to the money manager. And sometimes the relationship between the chief investment officer and the committee is highly functioning – and other times it is not.
“As a money manager, you cannot control those aspects of the process. The only thing you can control is to consistently and repeatedly communicate to your clients what it is you are trying to do and so set expectations – particularly on the downside – for what is within the realm of normalcy. That is because there is only one thing you can do when you are having a tough period of time – as every investor will on the path to success.
“And that is to have prepared in advance to buy yourself more time because clients will get shaken out when you are underperforming – 100% of the time. Maybe not all of them but that is how this business works. So – to use one of my favourite quotes from the show, which comes from Andy Golden at Princeton, who I worked with at Yale – what that means is: ‘To finish first, you first have to finish.’”
As Seides puts it, therefore, when it comes to specific investment ‘factors’, such as targeting value or growth-oriented businesses: “The problem is, if you are wrong for too long, you will not be left in the game to win – even if it turns out you are right over a long period of time – and that is the reality of the asset management business.
“The reality of asset management is not where I started my career. It may be the reality for Yale – where you can ride through all of that because of an incredibly high-functioning governance structure and a genuinely long time horizon – but it is not the reality for anybody else. Everybody wants to invest for the long term but they are likely to be answering to someone else who is not perfectly aligned with their thinking.”
As a strategy, value demands a level of discipline and – as the challenging period of the last decade has illustrated all too well – patience that is not always expected of other investors. Nevertheless, as we consistently and repeatedly communicate, here on The Value Perspective, there is now close to 150 years of historical data that shows value investing does, on average and over time, yield above-average returns.
Juan Torres Rodriguez
Fund Manager, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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