Leaders of business are well-suited to select investment managers, far better suited than consultants, who often conceal their lack of insight behind a wall of concepts and data.
Excellent investment managers should have two basic business skills common to astute business leaders — care in handling money and a sense of balancing opportunities and risk.
Why, then, are business leaders often dissatisfied with their choice of investment managers?
Too often, it’s because convenience dictates the choice. Somebody has a locker near you at the club. Your neighbor handles people’s money. Banks push existing clients to their investment departments.
But the easy choice has nothing to do with skill.
Many people don’t realize it is illegal to tie loans to the use of other products. So don’t think you’re under any obligation to your bank or that your bank relationship will be helped by buying its investment products.
It makes no more sense to allow your banker to lead you to an investment product than it does to have your repair shop manager lead you to a heart surgeon. Commercial banking and investment management are no more related than are adjusting an engine valve and replacing a heart valve.
The cardinal requirements for choosing your investment manager must be an alignment of interest with you and superior judgment. In large financial services companies, that alignment of interest is very difficult. Corporate goals and management incentive often compete with the customer’s interests — witness the recent sales-motivated abuses in the mutual fund business.
Fresh thinking is stifled by rigid policies and approved lists.
You could spend hours discussing what constitutes superior judgment, so we’ll save that for another day. Instead, here are a few observations on the current financial climate:
* All the dials on instruments of stimulus are turned up to their maximum.
* The dollar weakness will, in the short term, provide additional stimulus.
* Consumers, and to a lesser extent businesses, are joining government spending in an acceleration of economic growth.
* The balance sheet of the American consumer has deteriorated badly, buoyed only by strong housing prices.
* Debt relative to disposable income remains at unprecedented levels.
* Changes in the pricing and availability of home mortgages may be afoot. Should these take place, the repercussions in housing will threaten the recovery.
As of late October, stock market valuations were high. Analysts and investors like the improvements in corporate earnings. If the focus is limited to the next 12 months, the current optimism may be warranted.
Nevertheless, the value of any business, public or private, should be measured over a longer period. In this respect, caution is warranted, since today’s extraordinary resuscitation efforts on a leveraged economy will cause undesirable side effects.
Marc Heilweil ( [email protected]) is president and CEO of Spectrum Advisory Services Inc. The firm manages approximately $260 million in assets, including the Marathon Value Portfolio mutual fund. Reach him at (770) 393-8725.
