Investment Leadership and Portfolio Management

BRIAN SINGER is Chief Investment Officer of Singer Partners and Chairman of the CFA Institute Board of Governors. Previously, he was head of global investment solutions at UBS Global Asset Management (formerly Brinson Partners, Inc.), responsible for asset allocation and currency strategies. Singer is also Emeritus Board Member of the Research Foundation of CFA Institute and an advisory board member of the Journal of Performance Measurement. He is a recipient of the 1991 Graham and Dodd Award and a 2001 recipient of the Dietz Award. Singer holds an MBA from the University of Chicago. GREG FEDORINCHIK is head of investor solutions at Mesirow Advanced Strategies, Inc., an institutional fund of hedge funds firm based in Chicago. Prior to joining Mesirow, he was a senior strategist with the global investment solutions team at UBS Global Asset Management (formerly Brinson Partners, Inc.) and a member of the asset allocation and currency committee. Fedorinchik holds an MBA from the Kellogg School of Management, Northwestern University.

• Preface xiAcknowledgments xviiChapter 1 Characteristics of Successful Asset Management Firms 1You Can Take the Boy Out of the Culture, but You Can’t Take the Culture Out of the Boy 3Size Matters, but Not in the Way Most People Believe 7Governance: The Guardian of an Investment-Driven Firm 12Fostering Collaborative Freedom: Everybody is a Peer 19Integrity: An Unquestionable Characteristic of Success 23Conclusion 25Chapter 2 Building a Cathedral: A Framework for Turning the Mission into Collective Action 27A Framework for Effective Leadership and Management 28Establishing and Living Organizational Values 29Creating Mission and/or Investment Philosophy Statements 31Strategic Goals and Key Performance Indicators 33Conclusion 37Chapter 3 Building a Meritocracy: Understanding, Evaluating, and Rewarding Employee Contributions 39Performance: A Deeper Dive 39Horizon: The Fallacy of the Three-Year Track Record 40Performance Analysis: Practically Speaking 45Top-down and Bottom-up Approach to Determining Performance 48Designing Your Rating System to Help Make the Difficult Decisions 51What Does the Performance Score Really Mean? 53Criticality: A Deeper Dive 53Merit Zones: Putting It All Together 57Communication of Performance and Criticality 59Values and Compensation 64Conclusion 67Chapter 4 Investment Philosophy and Process: A Lofty Cathedral Needs a Deep Foundation 69The Importance of Investment Philosophy and Process in Investment Organizations 69Investment Philosophy: Core Beliefs 70Investment Process: Control and Anarchy 73Avoiding the Pitfalls of Behavioral Biases 78Conclusion 83Chapter 5 Investment Process in an Evolving World 85Implementation Overview: The “How” of the Investment Process 86Fundamental Valuation 88Market Behavior and How It Challenges the Fundamental Investor 90Team Behavior: Lessons for the CIO from Jelly Beans and Freud 118Portfolio Design 127Conclusion 129Chapter 6 Communication for Superior Client Outcomes 131The Problem: Human Nature 133A Classic Tale 134Case 1: Individual Investors, the Impact of Performance Chasing 137Case 2: Are Institutional Investors the “Smart Money?” 137The Reality of Investing in Equities 139The Mathematics of Recovery 142Dilemma: Investment Firm or Distribution Shop? 143The Importance of Culture 145Sales and Marketing in an Investment Firm 146Conclusion 149Appendix: Client Communication in Extreme Market Conditions 149Chapter 7 Where are the Clients’ Yachts?: Reasonable Fee Structures 159The “Gamma Trade” 161Anatomy of a Blowup 167Catch 22 168Faults of Existing Fee Structures 170Our Recommendation: High Integrity Fee Structures 178Conclusion 186Chapter 8 Final Thoughts 187Characteristics of Great Asset Management Firms 188It Starts with a Shared Mission and Values 188True Meritocracy 189Avoiding the Pitfalls 190For Successful Client Outcomes: Communicate, Communicate, Communicate 192It’s All about Incentives 193Integrity 193Notes 195Bibliography 201About the Authors 205Index 207