Uncertain Times



Institutional Investor Institute Roundtable

Tim Vos and I attended the Institutional Investor annual Roundtable for Consultants and Institutional Investors in Chicago in early October.  The Institutional Investor Institute’s mission is to bring senior executives in investment management, finance and business to Roundtable meetings so that they can discuss critical industry issues.  The Roundtable provides a forum for frank exchanges of views.  This conference takes place annually and is attended by the largest consulting firms, large plan sponsors and money managers.  The first day was about hedge funds.  The takeaways from this day were:

  1. Hedge funds did okay from 1998-2007.  They went down less than the S&P 500 in 2008 but were still down an average of about 20%. Hedge funds have done poorly compared to the S&P 500 since 2008.

  2. There is a great deal of pressure on hedge funds from large pension plans to lower their fees. It was the consensus that the management fee charged by hedge funds (typically 2.0% of assets) should be lowered and the management fee should not be a profit center.  The 20% participation in profits is not a concern because most hedge funds haven’t performed well enough since 2008 to earn this anyway.

  3. Hedge fund cash balances have gone up in the last few years as the “risk on, risk off” market has evolved because they don’t want to take risk in these uncertain times. They are tending to be fee collectors without taking the risk that their clients expect them to take for the high fees they are paying. Funds haven’t delivered Alpha over the past few years so they are managing their Beta.  A panel of consultants didn’t think that managing Beta justified a 2.0% management fee.

The second day covered topics like “Macro Issues, Micro Decisions” and “Low Yield Environment, High Price for Return”.  The key points about macro were:

  1. Global growth is slowing and this should continue as Europe, the U.S. and China all slow down.

  2. Stocks are at fair value at a 13.2 PE based on forward earnings.

  3. Profit margins may shrink as revenues fall as a result of the slowing global economy, and this may negatively affect the stock market.

  4. China is headed for a “hard landing” as their economy continues to slow down.

As it relates to the low yield environment the points were:

  1. Interest rates are low but could go lower and stay low for some time, like Japan for the last 20 years.

  2. The possibilities for defined benefit plans, endowments and foundations in a long term, low interest rate environment are to increase risk, increase contributions and/or cut spending.  Each of these alternatives is not very attractive.

Lunch with Austan Goolsbee

Austan Goolsbee was the lunch keynote speaker on the second day.  Austan, as you know, most recently served as Chairman of President Obama’s Council of Economic Advisers and a member of the Cabinet.  He was also the chief economist for the President’s Economic Recovery Advisory Board.  He currently is a professor at the University of Chicago’s Booth School of Business where he researches tax policy, American industry, technology and innovation.

I was privileged to sit next to him at lunch.  Why they put me there I will never know.  I will say right off the bat that I have rarely been as impressed with an individual as I was with Austan.  He is smart, articulate, knowledgeable, and one of the nicest and most entertaining people that I have ever met.  He also was born in Waco, Texas and his parents are retired in Abilene, Texas.

At lunch we discussed Reinhart and Rogoff’s book This Time Is Different: Eight Centuries of Financial Folly.  He knows both of them well and agrees with the history of financial crises documented in the book.  As you may recall, the book concludes that it takes 7-10 years to recover from the type of financial crisis we have just experienced as consumers gradually deleverage.  I pointed out that additional government debt is offsetting the reduction of private debt.  He doesn’t think this is a problem.  He says that we can accelerate the process by the government encouraging companies to create jobs in industries like clean energy through stimulus.  He also added that in spite of the Federal Reserve flooding the economy with money we will not have inflation because there is no “velocity of money”.  As you know this is the same position that we have at Monroe Vos concerning inflation.

He also said that he thinks the “fiscal cliff” will not be a problem because Congress will come to a compromise.  He thinks that if we go off the cliff at the end of the year there will be turmoil in the financial markets, but those in Congress will quickly come to a compromise because they will fear for their jobs.

He says that the U.S. is in okay shape and better than the rest of the world.  He thinks that in the U.S. demographics, productivity, cost of capital and entrepreneurship are better than the rest of the world.  Europe is a problem that will last for years.  He thinks that Germany does not want Greece or any other country out of the European Union.  He thinks they will do whatever it takes to keep the Union together.

Defined Contribution

There were panel discussions about defined contribution plans.  The only interesting discussion was about “custom target date funds” as a new concept.  As you know, Monroe Vos has been doing this for years.

Outsourced Chief Investment Officer (OCIO)

On the third day this was the major topic.  As a result of the market volatility in 2008, some plan sponsors and endowments/foundations are rethinking how to manage their assets.  When the markets were volatile the investment committees found it difficult to react quickly to the falling market.  As volunteers at endowments or foundations, the committee members felt helpless.  As a result, the OCIO concept is an option to allow the consultant to have discretion over the investments in order to react to the rapidly changing investment environment.  Consulting firms are offering this option in addition to the traditional consulting structure, and there are firms that have started in the last few years that only offer the OCIO model.  According to R. V. Kuhns & Associates, Inc., a consulting firm in Portland, Oregon, who doesn’t offer this service, there are only about 40 firms that specialize in OCIO, and most of them do not have a 3-year performance track record, much less a 5-year performance record.  Monroe Vos does offer this option and we have almost a 12-year performance track record.


I have added the Hoisington Investment Management Company Quarterly Review and Outlook because it explains the relationship to what the Federal Reserve is doing and its effects on the economy, the stock market and the bond market better that I can do myself.  Hoisington is a fixed income manager.  As you know we have a very high regard for Van Hoisington and his partner, Lacy Hunt, Ph.D.  Van has been right for 30 years.  His return for the last 20 years is 9.4% per year, net of fees, versus the S&P 500 return of 8.5%.  His return for the last 5 years is 12.7% per year, net of fees, versus the S&P 500 return of 1.1%.  Wow!

Jamison Monroe
Chairman & CEO