Monday, February 23, 2015

The Curious Case of Bowen, Hanes and Tampa Police and Fire Retirement Plan: Part 2

The Curious Case of Bowen, Hanes and Tampa Police and Fire Retirement Plan: Part 2

In the early days of institutional money management there were few, if any, benchmarks, and no consultants.  Congress’s enactment of the Employee Retirement Income Security Act (ERISA) paved the way for investment advisors to replace bank trust departments, stockbrokers, and corporate treasurers as managers of pension assets.  The pioneers in institutional money management offered balanced portfolios (usually more heavily weighted towards bonds than stocks).  It was the fiduciary standard set forth in ERISA that gave the green light to equity and real estate investments in pension plans.

It is in this environment that Harold J. Bowen, Sr. began managing a $12.1 million account for Tampa Police And Fire Retirement in 1974.  Hundreds of money managers were doing the same thing for state, municipal, and corporate pensions.  I’ve been privileged to work with a number of these firms over the years, such as Batterymarch, Brandywine, Hotchkiss and Wiley, Capital Group, and Wellington.  Each of these firms began just like Bowen, Hanes.  They had one or two individuals (Dean LeBaron, Anthony Hitschler, John Hotchkiss, George Wiley, David Fisher, and Robert Doran), who managed 100% of the assets of a client.  By the early 1980s it was evident that their respective equity products handily beat the S&P 500.

How was a client to know if Batterymarch or Wellington was doing a good job or not? A firm named A.G. Becker established the first return information to allow pensions to compare investment performance to a benchmark, and the consulting business was born. Before long Frank Russell, SEI, and other firms were offering consulting services to measure equity and fixed income performance.

To be sure, the money managers of the 1970s and early 1980s were not big fans of the consultants.  The consultants benchmarks and investment standards began to pigeon-hole managers into specialties like growth and value, large cap and small cap, and challenged the idea of a firm managing a combined portfolio of stocks and bonds.  While almost all of the managers with great track records accepted the consultants and their specialization, Bowen, Hanes did not.  In fact, Bowen, Hanes refused to deal with consultants.  As a result, it was impossible for them to scale up their businesses. Meanwhile Batterymarch, Brandywine, Hotchkiss, Wellington, and many other managers with great historic records accepted the restrictions and specialization imposed by investment consultants.

As a result of its decision, Bowen, Hanes had to trawl for business among small pensions and endowments and high net worth individuals.  It’s no surprise that they found success in Florida, as it is rife with pint-sized municipal pensions.  For many years, these small accounts were happy to have one manager invest all their money and were too small to be attractive to the consultants.  While Bowen, Hanes didn’t build a huge asset management business, Mr. Bowen and then his son were able to build a very profitable business.  Thus, I don’t think it is appropriate to jump to the conclusion that Bowen, Hanes has engaged in some deliberate impropriety because they refused to parlay their track record into a big consultant-driven asset management business.

In the middle to late 1990s almost every one of the pioneering managers ran into performance difficulties.  The ridiculous valuations of technology, telecommunications, and Internet stocks did not fit into the investment parameters of any of these managers.  I had a front row seat as Tony Hitschler, a gifted manager at Brandywine, watched the consultants fire him at virtually every one of his accounts.  Fortunately Brandywine, much like the other pioneering managers, had developed other products which helped the firms through the Internet bubble.

Bowen, Hanes had a similar drop in performance.  According to Tampa’s performance reports, Bowen underperformed the S&P 500 for several years in the late 1990s.  However, there wasn’t a consultant eager to make a change, so Bowen kept the account.  Moreover, there hadn’t been a consultant urging Tampa to hire small cap, international, high yield or other specialists.  Bowen just kept managing Tampa’s money, but was shut out from other institutional opportunities because they wouldn’t dance to the consultants’ tune.  Bowen’s performance improved after the Internet bubble popped.  Tony Hitschler and other pioneering managers didn’t get that chance because the consultants had taken away their accounts.

Critics have charged that Bowen, Hanes must be up to some impropriety because the principals failed to chase the tens of billions of dollars available in the consultant driven market.  What the critics fail to realize is that the Bowens have probably done rather well for themselves financially.  As owners of a firm with only a small number of employees, the Bowens are undoubtedly earning millions of dollars every year.  Today the firm has roughly $2.6 billion in assets, which translates into something like $11 million to $13 million in revenues.  Most of this revenue is profit to the owners.  Over the past forty years, Bowen hasn’t had to invest in additional product teams, extensive marketing, or sophisticated compliance systems.  It seems to me, they probably made a sound business decision.

In the next post, I’ll discuss the question of Bowen’s historic track record and then examine the weaknesses in Tampa’s oversight of Bowen.

No comments:

Post a Comment