2: Promising Firms Can and Do Go Awry
Manager B managed a large cap strategy in a number of accounts for Progress. One of the primary factors driving the hire decision was a strong historical return profile; the other compelling factor was the apparent strength of the firm’s experienced senior professionals. This firm demonstrates a case where the external and internal conditions which created the firm's historical outperformance changed significantly, highlighting weaknesses in the organization.
A senior partner and principal who helped generate performance history left the firm, and the departed professional’s responsibilities were assumed by another senior partner and mid-level and junior hires. These individuals were not as experienced or skilled with respect to portfolio management, and this became apparent in process execution, particularly in terms of stock valuation and selection. Annualized returns since inception deteriorated.
The firm was placed on Progress’ internal Watch List, resulting in an increased level of formal exchanges with the manager; following this program, Progress initiated a number of interactions with the manager, including on-site visits, in-person meetings at Progress and numerous conference calls.
Progress was unable to maintain confidence in the manager's remaining investment team, and the firm was terminated.
At the time of the firm's hire in the late ‘90s, close to the end of the bull market, the manager’s returns were impressive relative to the benchmark. As with many strategies which excelled during that period, however, more rigorous performance attribution later revealed the extent to which the returns were driven by alpha versus taking on more beta.
In addition, over time the activities of the organization, investment process, and personnel became concentrated in and influenced by a single individual; far more than at the time of hire. Ultimately, this individual departed the firm and consequently, 100% of remaining ownership was left with a single principal. There were not, however, sufficient incentives to retain the senior portfolio manager and junior analysts.
Overall, the lessons learned were to increase emphasis on the context for periods of outperformance relative to the benchmark, particularly in trending markets and to more explicitly recognize the significant impact of incentives and staff cohesiveness on a firm’s success.