January 2018 IssueLong scroll reading

Conflicts and Contradictions

By Edward A. Studzinski

“Success is never final. Failure is never fatal. It is courage that counts.”

        Winston S. Churchill

Some time ago, I was surprised by a conversation with my colleague Charles, finding him quite incensed about a visit he had made to a money manager, one of a series of such encounters that began at the Morningstar conference this year. It appears to have been a disconcerting discovery to Charles that the firm in question, rather than lowering their fees, which fell somewhat on the high side, preferred to keep the fees high so as to support the high life. Charles would define the high life as expensive office space in the high-rent district, along with a propensity for displays of conspicuous hospitality that would have caught Jay Gatsby’s attention. As David notes, separately, Ron Baron plays that game better than most. Lowering the fees would most likely have, as Charles argued, garnered enough in the way of assets to make up for the decreased expense ratio.

In that vein, I am reminded of the quote attributed to the Roman Emperor Caligula, “Money has no smell.” There is in the money management business, especially among active managers a sense of entitlement without par. And as the money rolls in, sometimes things change that impact the investors (the other people’s money that builds franchises) but receive little or no press. I am reminded of the situation of my former colleagues from Harris Associates, David Samra and Dan O’Keefe, both of whom departed Harris due to a disagreement about the timing of their becoming partners. Samra and O’Keefe went on to an enviable record of success launching the Artisan International Value Fund and the Artisan Global Value Fund. Both funds enjoyed periods of stellar investment performance, achieving five star ratings from Morningstar. They also managed to regularly outperform Herro’s funds with less risk.

We then had the March 7, 2013 initial public offering of the stock of Artisan Partners Asset Management, Inc. As a result of that IPO, Messrs. Samra and O’Keefe had valuations on their stock in Artisan worth in excess of $100M apiece. Subsequently, Mr. O’Keefe moved from San Francisco back to Illinois where his family and friends are, and now operates out of a satellite office there. Mr. Samra remains in San Francisco, in the financial district. Performance on both funds, while still good, has declined from being top decile. Why? That is probably a question worthy of a Harvard Business School case study. And my suspicion is that at the end of it, you will still not know the answer.

I recently had a dinner companion who is the individual responsible for selecting the Chief Investment Officer for one of the largest endowments in the world. As we discussed the investment world, and the performance of other endowment funds, it suddenly dawned on me that this person was frustrated that there was not some replicable formula or process that would ensure the success, first of the investment personnel selections, and then, of their respective investment performance. Probably the hardest thing for many to deal with in investment manager selections is that often the person or persons are one-offs. This stems from the fact that in many instances, especially as pertains to value investors, besides discipline, we see something that, as practiced, is as much an art as science. And in many instances, the human computers that we are seeing are indeed one-offs. Indeed, there is sometimes something about a time and place that produces a particular intellectual chemistry.

This is a little bit the problem one sees with what a friend of mine labels the “Buffett clones” who are the people who model themselves and their investment process on the way Warren Buffett invests. And yet, they rarely if ever even come close to, let alone replicate, Warren Buffett’s investments or performance. My friend would say that that is because the way that people think Buffett invests is not really the way he does invest, and I will defer to her in that regard.

But I do think that we underestimate, to our great loss, the extent to which the Buffetts, the Druckenmillers, the Millers, the Mungers, are all outliers more than two standard deviations removed, who have going on in their heads processes which are not easily replicated by a group of analysts and an investment committee sitting around a table. The latter, often more concerned with job security and the gathering of assets under management, are increasingly doomed to failure under the twin pressures of increased transparency and fee pressure.


2018 will be a very interesting year for investors. We are in a period of great innovation. We are also in a period when normalized investment returns have been distorted by ongoing central bank interventions, which have resulted in unintended consequences. An individual involved in the private equity world recently asked me how I was positioning my investments. My answer was that I was looking for uncorrelated investments whose market capitalizations were generally too small (and illiquid) for institutional investors to invest in (the ability to handle illiquidity being a competitive advantage for individuals). That is not an approach for everyone, especially since illiquidity can be a problem for those not prepared to deal with it. But it should be understood that illiquidity can be an opportunity. I also have a preference for businesses without a lot of debt that provide goods or services for which there is a regular and consistent demand, in meeting basic and ongoing needs. And for the very good business, be prepared to pay a fair price.


For those who are movie goers at this time of year, I highly recommend “Darkest Hour” and “Molly’s Game.” And for those with the patience to make your way through a long but worthwhile book, I highly recommend Ron Chernow’s new biography, Grant.

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About Edward A. Studzinski

Ed Studzinski has more than 30 years of institutional investment experience. He was a partner at Harris Associates in Chicago, Illinois. Harris is known for its value-oriented, bottom-up investment approach that frames the investment process as owning a piece of the business relative to the business value of the whole, ideally forever. At Harris, Ed was co-manager of the Oakmark Equity & Income Fund (OAKBX). During the nearly twelve years that he was in that role, the fund in 2006 won the Lipper Award in the balanced category for "Best Fund Over Five Years." Additionally, in 2011 the fund won the Lipper Award in the mixed-asset allocation moderate funds category as "Best Fund Over Ten Years. Concurrently Ed was also an equity research analyst, providing many of the ideas that contributed to the fund’s success. He has specialist knowledge in the defense, property-casualty insurance, and real estate industries, having followed and owned companies as diverse as Catellus Development, General Dynamics, Legacy Hotels, L-3, PartnerRe, Progressive Insurance, Renaissance Reinsurance, Rockwell Collins, SAFECO, St. Joe Corporation, Teledyne, and Textron. Before joining Harris Associates, over a period of more than 10 years, Ed was the Chief Investment Officer at the Mercantile National Bank of Indiana, and also served on their Executive and Asset-Liability Committees. Prior to Mercantile, Ed practiced law. A native of Peabody, Massachusetts, he received his A.B. in history (magna cum laude) from Boston College, where he was a Scholar of the College. He has a J.D. from Duke University and an M.B.A. in marketing and finance, as well as a Professional Accounting Program Certificate, from Northwestern University. Ed has earned the Chartered Financial Analyst credential. Ed belongs to the Investment Analyst Societies of Boston, Chicago, and New York City. He is admitted to the Bar in the District of Columbia, Illinois, and North Carolina.