Funds come on to investors as if they were Robert Redford, but scratch ’em and you find Walter Matthau

In my single days of 15 years past, I was never one to pursue swinging relationships or one-night stands. But it was back then — at age 37, divorced and intent on putting my life and children back on a firm family foundation — that I learned it indeed pays to advertise.

Yes, yours truly, whose advancing years now find him looking more like Walter Matthau, once promoted himself in a California newspaper as the “Robert Redford of Newport Beach.” I know, I know: a stretch. But the response was overwhelming. I got more letters than the Clinton White House has interns.

Despite the hundreds of letters to choose from, none led to anything more than an after-work drink. Advertising has its place in business, of course, as well as in love, and the trick from the standpoint of the seller has always been to catch the eye of the consumer and then to distinguish your product from the rest of the pack. “Robert Redford” was my eye-catcher, but the “sale” ultimately depended on Bill Gross.

The technique is much the same in the investment management business. You can’t market your services unless investors know who you are, but from that point forward the sale should depend more upon results than hyperbole.

I like to think that has been the case at Pacific Investment Management Co.

Ever since the mid-1970’s, my “Investment Outlook” newsletters, promotional pieces in major periodicals, frequent appearances on television and (last year) the publication of a book have been my attempt to advertise and to spread the word. But the hype has always been followed up by the numbers, and because that has been so, Pimco has prospered and yours truly has been able to sleep at night — comfortable in the knowledge that value has been provided with the glitz.

I don’t think that is the case with many or even most companies in this business, however.

The objective in money management, once you’ve caught the eye of the customer, is to outperform the market.

It’s not simply to protect principal — a no-brain investment in Treasury bills can do that. It’s not merely to provide an attractive return over and above inflation — a random assortment of stocks and even the recent inflation-indexed bonds can do that.

And it’s not to replicate the action of a Vegas casino — offering the prospect of limitless jackpots and ultimately providing the stark reality of countless empty wallets.

What money managers are supposed to do is to beat their bogey with as high a return and as little volatility as possible. Consistent outperformance over both short and long time periods is a non-academic way of expressing why money managers theoretically hang out their shingle in the first place. That and getting rich, of course.

The ax I have to grind with my profession is that the past several decades have been long on getting rich, and very short on outperforming. We’ve succeeded fabulously at self-promotion and failed miserably at providing value for the consumer. In these prosperous ’90s, our customers may actually have some yachts, but they’re a lot smaller than they should be because money managers have failed so miserably at providing value — at outperforming their bogeys.

Of course, I recognize that investment managers can’t outperform themselves, and that even theoretically only half of these “professionals” can possibly beat the market over the longer term. But, come on.

Example: Barron’s recently ran a cover article on “Mighty Mike” Price, the equity investor who’s managed to corral a sizable portion of the retail and institutional equity business on the basis of his reputation for being a tough guy and his ability to find undervalued stocks.

Mr. Price’s Mutual Series strategy has provided a three-year return of approximately 95% as of Dec. 31, a number that at first blush seems more than enough to justify why Barron’s and many others want to be like Mike.

Over the same time period, though, the market, as measured by the Standard & Poor’s 500 stock index, has provided a return of 125%. That, dear readers, is 30% more than Mike, or nearly 9% annually.

Now, Mr. Price has remarked in the past that he’s just trying to purchase undervalued securities, not beat the market. My point, though, is that his customers cannot give him a grade without an objective benchmark. Value should not just be in the mind of the beholder or the portfolio manager, as the case may be.

Other examples abound.

The current heartthrobs of the retail investment set — the Motley Fools –have demonstrated performance, it seems, that is certainly motley and more typical of fools than professional investors. A recent article in Forbes states that three of the four real money portfolios they have managed have lagged the market, one by more than 60% over the past two years.

Pick your own fabled money manager — I don’t want to get too nasty here — and do the leg work. Almost all of them have failed miserably to even come close to what the market (the S&P 500, the Nasdaq composite, the Frank Russell 2000) has done. The chart illustrates my complaint — and the industry’s black eye –better than these individual anecdotes.

Caveat emptor

So what’s the point here? Well, just that there’s a lot of false promotion in this business, and that while it pays to advertise, the buyer, as the saying goes, should beware.

It’s astounding to me that not only do almost all money managers — stock and bond alike — manage to underperform their bogeys, but they charge fees averaging nearly 1% of assets for the privilege of doing so. If managers can’t beat the market, they should at least have the guts to say so, then lower their fees with the same breath. All those high-priced analysts and expensive computers aren’t worth a damn if they’re not providing value.

Perhaps it’s time for a little downsizing and outsourcing in this business for a change, and for passing on those efficiencies in the form of lower prices. Better yet, if you can’t outperform, get out of the kitchen.

And if you won’t, then at least stop pretending you’re Robert Redford, because the ladies and the customers will find out sooner or later that you’re really just Walter Matthau.

William H. Gross is managing director of Pacific Investment Management Co. of Newport Beach, Calif. This article was adapted from his most recent “Investment Outlook” newsletter.

Related Topics: Pacific Investment Management Company (Pimco)