Friday, December 7, 2012

Portfolio Managers: What Do They Actually Do?

Portfolio Managers: What Do They Actually Do?

What does a portfolio manager do all day?  The best of them are trying to accomplish two seemingly opposite tasks.  On the one hand, they want to look far into the future and try to envision how the world, an industry, and a company is likely to look in five or ten years time.  On the other hand, they are digging deeply to unearth some facet of a business that is not appropriately reflected in the price of a stock or bond.

Spinning Our Wheels (1999)

If you peaked into your portfolio manager’s office you’d want to see him engrossed in conversation with an analyst, engaged in a phone conversation with company management, or immersed in the footnotes of a financial filing.  However, the most productive thing a portfolio manager can do is nothing.  There should be some part of the day when the portfolio manager is just thinking.  When I was at Legg Mason, Bill Miller, the portfolio manager for Value Trust, had venetian blinds installed on the inside windows of his office so he could get some time to himself. 

Unfortunately, the business of money management doesn’t value thinking or long term investment.  The business is about attracting new clients and retaining the old ones.  The marketplace values short-term results, so the portfolio manager’s task is to beat the market today, tomorrow, and this month.  So what does the portfolio manager’s day look like?  Most portfolio managers, until they become big and successful, invest a lot of time marketing.  Some of the time will be spent on the road with the marketer, which means your money is being managed on a mobile device.  However, even when the portfolio manager is in the office, a large part of his day will be consumed by meetings with prospective clients, vendors, and institutional brokers.   Everyone who wants to meet with the portfolio manager will swear that the meeting will only take 15 or 30 minutes, which really means 45 minutes to an hour.

The institutional salesmen and research analysts of investment banks (known as the “buy side”) will assault the portfolio manager’s email in-box and voice mail with all sorts of updates, “actionable” ideas, and revised estimates.  When I managed money, this stuff came in on a fax machine.  The only way to stem the flow was to periodically change the fax number.  This trick only worked for a couple of weeks.  Most of this material is geared to trading and speculating, rather than investing.  However, the vast majority of portfolio managers respond to these short-term stimuli, and before long they’re turning over their entire portfolio two or three times a year.

If a manager has a portfolio of 60 securities, and is adding 30 or 40 other names over the course of the year, he’s got about 400 quarterly earnings reports to digest.  Obviously, some of those reports are going to contain big surprises, both good and bad, requiring extra attention.  The portfolio manager is also going to have to deal with the occasional merger, product announcement, or management reshuffle.  Even if the portfolio manager has a team of analysts, he’s going to be overwhelmed with information.  When he’s not reading emails or taking meetings, he’s entering thousands of trades into the portfolio management system.  And, when the quarter comes to a close, he’s supposed to write a thoughtful newsletter to the clients that make it appear that he’s a thoughtful investor rather than a half-crazed day trader.

In fact, most portfolio managers have become traders.  Although the manager desperately wants to beat the market, all his frenzied activity guarantees that he will fail at his primary task.

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