EMPLOYEE BENEFIT FUNDS – PART VII THE SEARCH FOR NEW MANAGERS
Not uncommon for a new Chief Financial Officer, Joe Abely wanted a total review and restructure of the investment managers for the RJR funds. The time, effort, and expense involved were necessary, and almost incidental. (This process required a great deal of traveling, and people would ask about all the time I spent on the road. I answered jokingly, “With my bosses, Joe Abely and Treasurer John Dowdle, it’s just a question of ‘mind over matter.’ They don’t mind, and I don’t matter.”
Of course, this was untrue. Both were very supportive, and we all knew the work had to be done right. So, within reason the money spent was not an issue. The financial officers and the board had a fiduciary duty to both the pensioners and the stockholders, and they wanted due diligence to be thorough and well documented.[i]
THE SEARCHES AND RESULTS
Abely decided that the pension fund should be divided 65% in stocks and 35% in bonds, a conservative, traditional asset allocation. Hamilton & Co. led two searches – one for each asset category.[ii]
For bonds, Hamilton screened a huge universe and narrowed it to 25 candidates in 11 cities for an initial interview in the managers’ offices. Accompanied by Jim or one of his staff, I visited these candidates.
Then the consultants explained to me what I had heard. With no background in bonds whatsoever, I was like a freshman who suddenly found himself in a graduate level class on the nuances of bonds and bond management.
Hamilton & Co. prepared a 34 page report, detailing the “Fixed Income Manager Search and Selection.” It provided the selection criteria and how each prospect measured against them. Looking at a copy of this report today, I noticed that Hamilton diplomatically had me author the report to my bosses, even though my contribution to it was about 3%. This confirmed the skill of a good consultant – they did all the work, but made me look good.
From a short list, Hamilton accompanied my bosses and me for a final round of interviews, and they picked three. At each firm, we had outstanding portfolio managers and analysts.
J.P.Morgan Bank – New York. Depth in a number of creative areas such as pooled mortgages, long before they became popular.
Scudder, Stevens, & Clark – Boston. A bond department in one of the oldest and most respected mutual fund companies in the country.
Pimco – Newport Beach, California – A miniscule operation with only five or so professionals. A total contrast to the other two managers with decades of experience, This small shop had been in business for only about five years. The only reason that R.J.R. picked them was because they just seemed “smart.”[iii]
Unfortunately, I have no comparable report for the stock manager search. The process followed the same pattern, narrowing a long list to a group of finalists. RJR Picked:
Capital Guardian Trust – Los Angeles. A very large firm with offices in New York and San Francisco. Managed the American Funds family of funds. Great organizational depth. Led by one of the best known people in the industry.
Warburg, Pincus – New York. Founded by Eric Warburg and Lionel Pincus in 1966, the firm developed strong research capabilities across industries.
Reich & Tang – New York. A boutique founded by Joe Reich and Oscar Tang, the company specialized in detailed analysis of their holdings, a strategy learned by the founders at Donaldson. Lufkin, and Jenrette.
Batterymarch – Boston. Founded by Dean LeBaron, the firm pioneered in computerized trading and multi-strategy portfolios.
Wilkins & Nanovic – Greenwich, CT.- (Retained from original managers) The firm grew from the inhouse management of General Tire’s pension assets.
Over the years, I have followed the careers of these people. Some like Bob Kirby were already legends in the industry, but a number of the younger people went on to notable careers in investments. Some of the firms faded away when their founder retired. Other people moved on to new companies and continue manage money even now, over 40 years later. A few of the firms, Pimco and Warburg,Pincus have expanded into international giants in the industry.
STIRRING THE MIX
As RJR made acquisitions, managing the money managers grew more complex. With each acquisition came the acquired company’s pension fund and managers. They were integrated into the RJR fund. Because of the economies of scale, we could not retain all the managers that we inherited. If we had done so, the fund would have had 40 advisors when no more than 12 or so were needed. Along the way we picked up some fine advisors. A couple that come to mind are Delaware Investment Advisors in Philadelphia, F. Eberstadt in New York, and Fayez Sarofim in Houston. Unfortunately we had to dismiss others for no reason other than they were redundant.
None of the Treasurer Department staff had conducted a money manager search, and the broad exposure – managers, presentations and styles, preparation of criteria, conducting interviews, and critiquing the information received – was a valuable experience.
For seven years, I regularly met with each of these money managers. If the manager search was like a master’s degree, then the continuing work was a doctorate. Every quarter the managers wrote or met to review their research and portfolios. I was able to learn from the best, thanks to Hamilton & Co.’s selections. The managers gave insights that have stood the test of time with me, and I am grateful for that opportunity. Some of them still stay in contact with me, and it has been a pleasure to track their progress over the years.
I tried to build a personal relationship with the managers, unlike some of my industry peers who wanted to engage at arms-length. These firms were potential investors in RJR stock, and we treated them as clients as well as vendors. The Capital Guardian team came to Winston-Salem for a quarterly meeting and my wife invited them for dinner at our home. Later, the portfolio manager told me that was the only time a client had ever invited him to their home. That was simply the RJR way of treating people. My bosses supported and encouraged a collegial relationship with the advisors.
[i] The benefit assets were $600 million [2022 - $2.6 billion]. The forecast was another $100 million to be added each year for several years. The actual contribution was $250 million and by 1988 the assets were $4.5 billion [2022 - $11 billion].
[ii] After reading my story about Jim Hamilton, he responded to my comments about language issues with my boss: “We both had language problems: if you recall my first visit to Winston-Salem I asked the waitress at my hotel for ‘two eggs over easy with toast and coffee’. She looked puzzled at the strange accent, and then asked me to repeat the order slowly. I did. I ate. I reported to your office, and the rest is history.” In 1978, all the citizens of the Camel City had not yet fully accepted the culture of “one nation and one language.” After all, the Civil War had ‘only been over for 113 years, and Yankees were not yet to be fully trusted.
[iii] We will cover our interview meetings with Pimco and its future success in another post.