Saturday, December 1, 2012

The Art of Saying “No” in Money Management

The Art of Saying “No” in Money Management

An endowment or pension plan can only employ so many investment managers, and yet hundreds, if not thousands of managers think they are amply qualified to serve in some capacity.  Moreover, many of these would-be managers have connections and influence.  Even if the investment idea is patently terrible, neither staff nor trustees nor politicians want to piss off the manager.  After all, he’s a donor to the university, or a friend of a major campaign contributor, or a possibly a future reference for a staff member looking for a better job.  While quickly saying “no” would save everyone time, it’s like a death in a melodramatic play.  The bad investment idea is going to linger because no one wants to be responsible for killing it until the last possible moment.

You Must Take This Meeting (2003)

The most senior people (e.g. Treasurers, board chairman) aren’t going to deliver the bad news themselves.  The nasty job is going to be delegated.  As CIO at North Carolina, it was my job to let the manager down gently.  Despite my best attempts to be kind and use a variety of tactics (see below) many managers would feign insult and complain to the Treasurer that I’d been unfair or overlooked some morsel of information.  On occasion, we’d have to reopen the process and give the manager another meeting to make his case, knowing full well the answer was always going to be “no.”

One of my favorite tactics was to use the “extended no.”  I’d let a politically connected manager have a series of meetings, and I’d even begin to conduct due diligence on his awful product.  Sometimes at North Carolina, we might include the manager in the finals.  When I finally said “no,” I would soothe the manager’s wound by telling him how fortunate he’d been to get so far in our rigorous investment process.  When I ran TradeStreet, I think we got to the semi-finals or even finals just because the potential client didn’t want to anger NationsBank’s senior management.  There was no way they were going to hire a bank-owned money management firm, but they’d let us think we had a chance.

“The stall” was another tactic in my arsenal.  It worked this way.  All of sudden, I couldn’t come up with any dates in the next six months for a due diligence review, or I had our lawyers continually mark up the legal documents (it was much cheaper to pay legal fees than management fees on a potentially bad investment).  I was hoping the manager would fill his fund with other investors or just go away in disappointment.  Better yet, the manager might decide to blame the lawyers and not us.

On other occasions we used the “we might” strategy, as in we might invest if you can round up enough other interested investors.  The hope, of course, was that no one else would be willing to invest, and the manager would disappear.  Every now and again this tactic backfired, and the manager returned with a prospect or two in tow.  At that point, we’d employ the stall.

In one instance, we challenged a local private equity manager to round up other investors.  A couple of months later, he returned with a short list, but a list nonetheless.  I couldn’t believe that anyone was willing to invest with this manager, but I was trapped by my challenge.  In desperation, I decided to call the other investors on the manager’s list to verify their interest.  It turned out that the other investors had used the same tactic as me.  They’d said they might be willing to invest if North Carolina committed.  In fact, the manager had not signed up anyone.

Eventually, I’d have no choice but to say no.  However, I seldom cited the manager’s shortcomings.  Rather, I borrowed from the world of teenage breakups:  ‘”it’s not anything about you, it’s me.”  Here is a partial list of my turndown lines (imagine these lines being delivered in a sincere voice):

·      “We’d love to move forward, but we just can’t move our consultant.  I am sure you appreciate that we can’t approve an investment without the consultant’s approval.”  Never mind the fact that I’d helped the consultant to write a negative report.

·      “We’re really sorry, but since we began due diligence we’ve become over allocated to your product [the shelf is full].  If we have room in the future we’d really like to re-engage.”

·      “We’ve had recent turnover, and it really isn’t fair to add any investments until the new person has settled into their role.  I will arrange for you to meet them in the future.  Too bad it didn’t work out this time.”

·      “We’re taking a different strategic direction.  Your product is great [not really], but we’re just not going to hire anyone doing what you do.”  I had to be careful with this one, as disappointed managers watched closely to see who got hired in the future.

When existing managers failed to perform, I tended to use the “it’s not you it’s me” approach when we fired them.  Their performance might be in the bottom quartile for every imaginable time period, but when the time came, we often gave an explanation about changing strategic direction, unbalanced allocations, or some other pabulum. 

The funny part is that when I was a money manager and received this type of convoluted turndown, I felt better.  I wanted to believe that I really wasn’t that bad, and moreover, I could tell my bosses that I hadn’t been fired for cause.

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