Human Input in Investment Management Is a Feature, Not a Bug

Asset Management COVID-19 Coverage Industry Trends

Golden Hour: 1977 Porsche 930 Turbo (Pinterest).

In the mid-1970s, sports car racing requirements changed such that manufacturers could only race models that were also widely available through dealer networks.  Porsche responded by developing the 930 Turbo, a 911 Carrera with upgraded suspension, larger brakes, and an uprated version of its six-cylinder boxer motor enhanced by a large diameter turbocharger.  The 930 turbo became popular with enthusiasts as it was the fastest car built in Germany.  For unskilled drivers, it was also quite dangerous.  With a twitchy, short wheelbase prone to oversteer and non-linear gushes of power from the turbocharger, it was all too easy to spin – even in ideal conditions.  As a consequence, the 930 Turbo earned the nickname that has stuck with it: the Widowmaker.

To those who enjoy a direct connection with the road, the difficulty of controlling a vintage 930 Turbo at the limit is a feature, not a bug.  The short wheelbase and rear-weight bias that produce oversteer make the car responsive, not dangerous.  And the surge of power from the turbocharger makes the car undeniably fast – so long as it’s pointed in the right direction.  If you can stay ahead of the car and master the capabilities of a 930 Turbo, you know you’re a good driver.

Is human input in investment management a feature, or a bug?  A generation of CFA charterholders have endured a curriculum that forcefully documents the futility of active management.  The second decade of the millennium seemed to back this up, as anyone who owned anything other than a long-only position in an S&P 500 index fund probably regretted it.  Even in an innovation economy, a cap-weighted index that favored big tech beat most alternatives.  Thinking seemed overrated.

Then the pandemic hit, and suddenly all asset pricing was non-linear.  With a K-shaped recovery, an unsteady bond market, sagging dollar, a resurgence in value stocks, and talk of inflation, there’s no idiot-proof approach to investing.

Does the market agree?  Affiliated Managers Group share price sagged for years, dropping along with prospects for the active managers it acquired over the years.  AMG hit bottom on March 20, 2020, closing under $50 per share.  It’s approximately triple that today – back to levels it hasn’t seen since the summer of 2018.  Franklin Resources’ shares are trading at double what they were a year ago, as are Silvercrest, Diamond Hill, Federated, and T. Rowe Price.  Not every publicly traded asset manager has performed that well, but the turnaround in fortunes on many firms’ five-year charts is worth a look.

Sometimes it seems like investment management is going to be entirely performed by one cloud server.  We talk with many in the wealth management space who think active asset management has already been entirely supplanted by indexed products. And we know more than a few asset managers who think wealth management services could be performed just as well by robo-advisors.  Our experience has been that human input finds unique solutions, secures and strengthens relationships, and ultimately provides clients with the best outcomes. Algorithms can be great tools, so long as their user has great skills.

The capable but tricky 930 Turbo was not the start of a trend. Today, automakers are focused on building cars that will be self-parking, self-driving transportation vessels to mindlessly convey occupants in hermetically sealed cocoons. Even current iterations of the Porsche Turbo have all-wheel drive, traction control, automatic transmissions, and enough engine management systems to make them practically idiot-proof.  But dumbing down driving doesn’t produce better drivers, any more than dumbing down investment management improves investment outcomes. Thinking still matters in this industry, thankfully.  It’s also more fun.