Ingredients for Successful Investors: 'Time, Capital, Fortitude'

Legg Mason Capital Management's Michael Mauboussin warns investors to manage expectations.

(August 23, 2012) — Equity investors must distinguish between fundamentals and expectations, says Michael Mauboussin, chief investment strategist at Legg Mason Capital Management.

In other words, the key to generating excess returns is the ability to distinguish between price and value. Therefore, the most basic question investors must always answer: what’s priced in?

Mauboussin writes: “The key to successful investing, then, is to explicitly distinguish between fundamentals — the value of the company based on financial results in the future — and expectations — the market price and what it implies about those results. This is really difficult for at least a couple of reasons. The first is that normal humans prefer to be part of the crowd and that preference is what simultaneously leads to market inefficiency and an inability to take advantage of it.”

According to Mauboussin, the natural tendency among investors is to blur the distinction between fundamentals and expectations. He notes that when fundamentals are good, investors want to buy; when they’re bad they want to sell.

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He continues: “At this point, there should be no doubt that price and value diverge — and sometimes significantly. The problem is in taking advantage of it. And therein lies the key: The very factors that cause market inefficiencies make them difficult to exploit. That’s why finance professors are so smug when they condemn active money managers — the professors don’t doubt the existence of inefficiencies; they doubt the existence of investors who can systematically exploit those inefficiencies (especially after costs).”

Despite the skepticism of active managers, a 2011 paper co-authored by Robert Jones of Arwen Advisors notes that active management will always have a place in “mostly efficient markets.” And while many academic studies indicate that the average active manager doesn’t add value, Jones told aiCIO, “Its [it’s] the combined activity of all these active managers that keep markets efficient and thereby hard to beat, and efficient markets mean better capital allocation, and thus greater growth and wealth for society as a whole.” He concluded, “To reap this huge benefit, markets must encourage active management, which they do by heaping huge rewards on SAMs. Our paper also highlights that it may be possible for fund investors to identify superior active managers (SAMs) in advance based on various metrics and characteristics.”

SSgA Institutional Sales Head Jumps to Rival Pyramis

Maureen Fitzgerald is leaving SSgA for Pyramis; Kristi Mitchem, who had been sharing responsibilities with Fitzgerald, will now take sole leadership of the firm’s Institutional Client Group.

(August 23, 2012)–Maureen Fitzgerald, State Street Global Advisors’ (SSgA) co-head of the Institutional Client Group for North America, has left the firm for rival asset manager Pyramis.

Kristi Mitchen, who has been sharing the role with Fitzgerald, will now take sole responsibility for the group.

“Since joining SSgA in 2010, Kristi Mitchem has made a significant impact on SSgA,” State Street told aiCIO. “Under Kristi’s leadership, SSgA has made substantial inroads in the global defined contribution business, increasing assets under management to more than $200 billion. At the beginning of this year, Kristi took on additional responsibilities managing our sub-advisory business and other aspects of our institutional business.”

“Kristi Mitchem will assume the role of head of the Institutional Client Group for North America,” the firm continued. “Maureen Fitzgerald, who previously led this group together with Kristi, is leaving to pursue other opportunities.”

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SSgA is the asset management business of Boston-based State Street. Rhode Island-based Pyramis is the institutional asset management arm of Fidelity, the $1.5 trillion financial services complex.

Fitzgerald will now take the newly-created role of head of North American institutional distribution, according to Pyramis. She will be “responsible for US and Canadian sales and global consulting relations,” the firm said.

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