The content below is extracted from an interview with Steve Romick of First Pacific Advisors (Newsletter Fall 2010) published by Columbia Business School. Be sure to browse the other quarterly newsletters containing interviews with well-known investors. Many thanks to my friend Janice Davies of Karlin Asset Management for tipping PM Jar on this useful link. For more information on Steve Romick and FPA's investment philosophy, explore the FPA website – there’s a wealth of information from old letters, speech transcripts, etc.
“I felt that most mutual funds were style box constrained, and didn't take advantage of a deep toolbox…I didn't think there were a lot of public funds out there that invested in such diverse asset classes, but felt that such a vehicle made sense for people. For years, I had to fight the idea that I was a style box manager.”
We’ve previously discussed how the investment management business is no different from a business that makes widgets. It is important to consider one’s competitive advantage vs. the competition, which in Romick’s case is differentiation through creativity of investment mandate.
Romick’s Crescent Fund has the ability implement a variety of investment strategies – such as buying residential whole loans, investing with a community bank private fund, shorting securities, etc. – in a go anywhere opportunistic approach. His mutual fund peers, with their mandate restrictions, are usually not allowed to take advantage of this “deep toolbox.”
Although this freedom to roam mandate may seem like common sense (and more frequently observed with hedge funds), it is still a rarity in today’s institutional mutual fund world, let alone back in the early 1990s.
“I realized that you can’t wear all the hats well, and I was wearing too many hats. I wanted to just focus on investing. I wanted someone to insulate me from the marketing and back office. It just took too much time away from the portfolio.”
On why he joined FPA after running his own money management firm for a few years. Romick was wise in recognizing his strength as an investor and potential weakness (or perhaps just low interest level) in dealing with marketing and back office operations.
I have often told people that the investment management business is a 3-legged-stool with each leg representing:
- Marketing / Client Management
In my previous position at a large single family office with substantial external manager allocations, I had the benefit of meeting many bright investors who left existing employers to launch their own funds. The common denominator for success was surprisingly not investment acumen (of course that helps), it was thoughtful consideration of all three legs of the stool.
With a finite 24 hours in a day, any extra time spent on operations or marketing, equates to less time spent on investing. Few people manage to successfully juggle all three roles. For those who cannot, or prefer not to juggle, the key is to not underestimate the importance of operations and marketing when building an investment management business, and seek help / external expertise when necessary, as Romick did.
“Honestly, people shouldn't have given me money then [when he started his own money management firm in 1990]. With what I know now, and what I thought I knew then, it’s such a vast difference. People took a chance on me…I’m better now than I was then. I think that in the money management business, knowledge is cumulative, or rather should be cumulative rather than repetitive, and one should improve the longer one is in the business. I’m much more comfortable wearing the skin of an investor than I was back then. I guess I was too ignorant to realize that when I was younger.”
“G&D: In your first letter in 1993, you wrote that you often found niche companies with excellent track records that Wall Street has yet to discover. Is it worth your time looking for these opportunities now that you have $4 billion under management?
SR: I think that I was naïve. What is really undiscovered? I think it's morphed from undiscovered to unloved or misunderstood. There aren’t that many undiscovered names out there.”
Other well-known investors have discussed the importance of awareness in the past. Unfortunately, self-awareness is difficult to learn. An effort can be made, but perhaps it merely leads us to think that we are self-aware. Often times, only the benefit of time and experience can reveal to us the mistakes/naiveté of our past/youth.