Long-Term Thinking as a Contrarian Approach

One of the most interesting pieces I’ve come across lately deals with an investment firm that’s been managing the pension plan for Tampa’s police and firefighters for over 40 years. There’s a soap opera brewing between the investment firm, Bowen, Hanes, and a consulting firm that doesn’t agree with the way they do things from an operational standpoint.

The entire piece from Chief Investment Officer is worth reading because I think it outlines some of the issues that investment firms deal with concerning the institutional imperative. But setting aside all of the back and forth between consultants and trustees, Bowen, Hanes has an impressive long-term track record of performance:

Since 1974, Tampa has done what most in the industry consider unthinkable. Casting aside the sacred tenet of diversification, the fund’s board entrusts all of its members’ retirements with a single money manager. And Harold ‘Jay’ Bowen III—and his father Harold Bowen II before him— have delivered, fabulously so. Tampa’s 12.3% annualized returns under Bowen, Hanes make it not only the most strangely managed public pension in America, but also perhaps the best performing. The massive and acclaimed Ontario Teachers’ Pension Plan—think Harvard to Bowen, Hanes’ community college—touts itself as the highest earner among major institutional investors worldwide. But the five-person shop in Atlanta beats Ontario Teachers’ in the short game (22.1% to 10.9% last reporting year) and the long (9.8% versus 8.9% over 10 years). As one elderly former firefighter told me, “Mr. Bowen and his father have worked miracles.”

Now here’s a description of their investing style, which is fairly simple compared to the alternatives practiced today:

For the first 12 years under Harold Bowen II’s control, Tampa’s stock portfolio beat the S&P 500 every single year. Twenty-nine years later, there is still nothing fancy about Bowen, Hanes’ approach. Current President Jay Bowen—Harold’s son—takes pride in that. Like his father before him, he’s an old-fashioned, value-oriented, buy-and-hold stock picker who identifies broad economic themes and trades on them. Bowen, Hanes doesn’t short sell stocks. It doesn’t mess with derivatives. It doesn’t focus on fixed income, except as a hedge for its equity holdings. While the vast majority of institutions have diversified into hedge funds, private equity, and real estate, Tampa remains all in on public markets.

Compounding assets at 12.3% per year over 41 years turns $1 million into more than $100 million. Not bad. The article favorably compares Bowen, Hanes and their performance history to Warren Buffett’s. And while their track record is impressive, I don’t think that their performance is the most impressive aspect of this story.

Consider the fact that since 1974 the entire U.S. stock market has returned 11.1% per year. Large cap value stocks as a group have done even better at 12.1% while mid cap value (13.3%) and small cap value (14.7%) have offered even higher returns. I’m not trying to diminish Bowen, Hanes’ performance record by any means with these comparisons. They discovered the the value factor long before most other investors and stuck with it. You have to give them credit for maintaining such a disciplined approach for so long when everyone else around them was jumping in and out of the most recent short-term performers. Their returns are shown gross of fees, so that’s something to consider as well, but they only charge 0.25% to the pension plan because they’re such a large client (another aspect of their approach I have great deal of respect for).

But what I find fascinating about this story is the fact that the trustees of the pension plan had the gumption to stick with a long-term strategy in the stock market for decades on end. Here’s one of the pension’s trustees explaining their thoughts on this unorthodox strategy:

“We’ve never had the need for a consultant, so why spend the money when we’re probably not going to listen to them anyway?” Mark Bogush, a fire department district chief, has chaired Tampa’s pension board since last February. “We go to the investment conferences and people come up to us and ask why we have only one manager, and why we don’t have a consultant,” he says. “Frankly, I would hate to make a decision based on one person coming in and saying, ‘You’re taking too much risk.’” Bogush repeats a phrase I hear from nearly every retiree, board member, or other stakeholder involved with Tampa’s pension: “If it ain’t broke, don’t fix it.”

A recent research study on UK pension funds found that in 2008 the pensions would typically give underperforming managers 20 months to recover from their poor performance before firing them. These days the window has dropped to just 12 months. The long-term is becoming shorter and shorter all the time.

I think it’s remarkable that others should find it remarkable that a low fee, long-term strategy has been so successfully implemented by a fund with a long-term mandate. This story proves that thinking and acting for the long-term, when your time horizon dictates that stance, can be one of the most powerful investment strategies because so few investors have the discipline to pull it off.

The Riddle in Tampa Bay (CIO)

Further Reading:
Would Keynes Have Been Fired as an Investment Manager Today?

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  1. MarketFox commented on Feb 25

    Great post Ben. Unfortunately consultants will always push institutional investors toward having more asset classes and fund managers in their portfolios.The more complex the portfolio, the greater the reliance of the confused client on the consultant!

    I’ve written about the reasons why most institutional investors “diworsify” their portfolios with too many fund managers:


    • Ben commented on Feb 25

      Thanks. The allure of finding something better is always there because there are so many options available. Good one

    • Ben commented on Feb 25

      I just came across that study recently. But people say it’s the “smart money” right?

      • MarketFox commented on Feb 25

        Smart money is still human, it shares the same biases as everyone else.

        Group decision-making also leaves a lot to be desired.

        “In all the parks in all the cities, I’ve yet to see a statue of committees!”

        • Ben commented on Feb 26

          Exactly. The mistakes might be coming from a different place and level of knowledge but they still occur nonetheless.

  2. Scott Boone commented on Feb 26

    Ben: In my experience, fund consultants were always driven by the need to: 1) chase performance, and/or 2) reduce fund manager (but not their own!) expenses. If they were not constantly doing one or both of these things, the client might begin to wonder why they needed the consultant!

    • Ben commented on Feb 26

      Right. Unfortunately most (not all) consultants spend most of their time trying to look busy to prove their worth to the client. Many look for others to blame so they can keep their job, too.