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The Investment People of Batterymarch 

“A Glimmer of the Investment Future from a Reflection of Its Past”

Remarks at the January 10, 2007 meeting of the
Boston Security Analysts Society

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I have had an incredible experience working with the most intelligent, motivated people upon whose shoulders I have stood: Jeremy Grantham, Richard Vancil, my father Francis and son Blake, Alan Strassman, Dick Mayo, Steve Swensrud, King Durant, Evan Schulman, David Gill, Alexis Belash, Paul Rugo, Charley Ellis, Bob Monks, Jim Gipson and, of course, my colleague now, Marilyn Pitchford. And Arnie Wood who was kind enough and brave enough to introduce me … I would like to meet the wonderful guy he described.

And experiences: Ling taught me about cash; Vancil about investment skills; Grantham about stock selection (funny names); Moseley about research investment ties; a printing company about non-consolidated subsidiaries.

As a youth I had an appetite for the novel. Anything that worked could be made to work better ... usually with machines. In today’s diagnosis, I would have had attention deficit disorder and been put on medication never to bother anyone again. I was far more interested in how things and markets worked than making money with them. And continue so today.

As a student I was thrilled with the ability to capture the world’s knowledge by having a stack card at Widener Library and, as an undergraduate, having a study carrel. I could follow a thread of the world’s questions and answers from one level to another. Today I can do the same thing on a computer ... a computerized literary dilettante.

Our goal in starting Batterymarch was to bring academe to investments. As one friend remarked when I offered to introduce him to Prof. Colyer Crum, then teaching Mrs. Heald and investment management at the Harvard Business School: “I’ll meet him when his portfolio is bigger than mine.” That suggested there was an opening to applying investment insights from academics to the real world at a research cost of the price of a subscription to the Journal of Finance. [About Mrs. Heald: All the cases for the semester were investment problems related to a client of the student, Mrs. Heald. She had problems that arose which the student had to solve … like some family member needed cash. Of course, she was fictional but seemed awfully real to the students who were sweating over her problems.]

And I have had the highs and lows of spectacular results and horrid ones. Pretty much what one would expect from a low correlation portfolio. It is not surprising that I was an enthusiastic member of the CFA group that laid out principles for full disclosure of returns. And our passion at Batterymarch for transparency led to publishing all our business data and even running training programs for clients—and even competitors—on how to do what we did. Thanks, Arnie Wood. There was even a rumor running around that Stan Calderwood had a mole inside Batterymarch so he could learn all our secrets. True ... I was the mole.

Only a little later, under John Shad, I chaired an SEC advisory committee on governance. The committee included Arthur Goldberg, Bob Rubin, Bob Greenhill, Bruce Wasserstein, and others of the same ilk ... I was chairman only because I was the only one who did not want the job. I came to believe that transparency, even if forced, would solve most regulatory problems. And also that never, never would I have the patience for a job in the federal government.

One can never say who started what in the investment area. We (in this room) are stitched together so closely there is nothing that is really proprietary. But we were associated in the early days of indexing, quant models, low-cost basket trading, internal computerization, brutally low trading costs, emerging markets, and investing in developed markets. Fortunately, friends forget our efforts to make farm land an asset class (similar argument as timber but with higher costs and subsidies but more liquidity); a Russian fund under the sponsorship of the former Soviet government (right idea, wrong government); a suggested outline to rent proxies; efforts to integrate physics/complexity into investment decisions (one of the reasons for publishing Complexity Digest but yet to be accomplished although several are making a promising effort).

Now that I’m trapped by the enticements of the web for everything and still experimenting, my plea to you is to finish jobs that I started ... but which are yet to be completed.

1. Reconcile investment management as a business and as a profession. As Justice Brandeis commented: “A profession has intellectual content; serves others not oneself; and financial rewards are not the measure of success.” Admittedly, there is a cycle: business when there is a bull market where returns are huge; numbers of HBS students; salaries, bull market ... 18-year or 64-year. Profession ... do things that are in the client’s interest but damage the agent.

2. Soft dollars: we all agree this is a non-efficiency that deserves to be cleaned up although we all have our hands in the cookie jar now.

3. Fewer investment people and lower cost. Jack Bogle and I share this 25 year-old forecast with the tolerance of good friends who do not remind us (while they stand in long lines for year-end bonuses).

In most fields, control is moving to the ultimate consumer away from the provider. In investments we have more levels of agents, partly to share responsibility that is largely chance in the occupational terms we use to measure; hence we use layers of consultants and high costs as occupational insurance without knowing what “coverage” we are getting for the premiums.

I thought that transparency would bring rationality and separate agent marketing considerations from investment return-related decision structures. I’m wrong ... at least wrong to date. My plea to you is to pick up the cudgel ... while I return to YouTube.