The Dividend Cafe - Never Forget the Deja Vu of the GFC and a Love Letter to NYC

Episode Date: October 16, 2020

Late in 2006 I was running a practice at UBS Wealth Management and using their equity management team out of Chicago for a lot of my equity management services. I would go to Chicago and meet with them at least a couple of times a year and found the process collaborative, informative, and intellectually engaging. But all of my other money manager relationships were in New York City, so when UBS asked me to go to speak to their new advisor class in November that year (in Weehawken, NJ, where their operational headquarters are that they inherited from the old Paine Webber), I decided to schedule a few meetings with other portfolio relationships. I was only overseeing $100 million at the time, 4% of the assets we manage now, yet it never occurred to me that I may have a hard time scheduling appointments. As a pure aside, this trip double-dipped as a recruiting trip for another major Wall Street firm who was pushing me to join them in the opening of a new Newport Beach office for their firm. I met with their legendary CEO, a fellow named Ace Greenberg, and heavily considered their extremely flattering offer. The name of that firm … Bear Stearns. In March 2008, they would be dead and gone, sold to the loving arms of JP Morgan for $2 per share (from over $150). Suffice it to say, I didn’t join them after those enticing meetings. God was watching. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello, welcome to this week's Dividend Cafe podcast and video. And I am sitting here in the office in New York City on Friday morning after one monstrous week. I think it's been, it's well over 20 meetings that we've had as part of our annual kind of money manager due diligence marathon. And I will tell you that this year has been a particularly memorable one. And I think I'm going to talk today here a little bit about why that may be. The Dividend Cafe this week was devoted to kind of the history of this week, to be honest with you, the history to how the Bonson Group made a really rigorous sit-down with our money manager relationships

a part of our story and a part of our tradition and what that has meant to our business over the years. And so in writing it, I did a little bit of a trip down memory lane, not really on purpose, but it just kind of evolved that way. Not really on purpose, but it just kind of evolved that way. And then tried to lead into a lot of what I think is significant for our clients and for investors right now. And what this week, what our intentions and our objectives were this week in terms of solidifying some portfolio thinking and planning in light of the circumstances in which we all find ourselves. The trip began in 2006, and so this is my 15th year devoting a week in the fall. It's pretty much always been October, but there were a couple years where I think it may have been early November and even late September, but right around this time of year.

And initially, in 2006, I was still working at a firm called UBS. I left six months or so later. But I had been going to Chicago several times a year to meet with Global Asset Management. GAM was a proprietary equity management group out of UBS that I had a lot of client money invested with. And I met with them a lot because they made it available and I learned so much from it. I mean, these were kind of Buffett, And I learned so much from it. I mean, these were kind of Buffett, Graham, deep value, intrinsic value equity investors. And it was a school of thought that I was learning from. And I thought to myself, if I'm if I'm enjoying this with just our some of our equity people, why not seek to do it with the other asset classes in which we have client money invested in fixed income and municipals. And we had a smaller but nevertheless still important alternatives business then. And so I had been invited to come to New York to speak at an event with UBS. I also snuck in on that trip, what was a recruiting trip, as a company by the name of

Bear Stearns was seeking to bring me on board. And needless to say, I not only did not end up joining them, but I did avoid, obviously, a tremendous train accident that was to come about 18 months later. But on that trip back in the fall of 2006, I actually got to meet with Ace Greenberg, a longtime CEO at Bear Stearns. And it was a very memorable time. But it was the first of what now has become this week where I would sit down with some of the money managers. now has become this week where I would sit down with some of the money managers. And, you know, we have a certain amount of clout now where most of the meetings I desire to get, I can get. And yet the truth is that back then I was managing 4% of the assets that we're managing now. We're managing about $2.5 billion right now. We were managing $100 million at the time.

And it was just me and a junior advisor, and I had a full-time administrative assistant. I don't even think I had a second admin on the team yet. So we were a smaller practice, but it just never occurred to me that some of these managers may not be keen to meet with me at that size and stature. So it wasn't so much that I had a lot of hubris as much as I just was ignorant enough to not know what I didn't know. And we got the meetings.

So anyways, that was the start of it. And it was a smaller scale, a lot less managers. We were investing in a lot less strategies. We were doing a lot less niche things. A lot less managers. We were investing in a lot less strategies. We were doing a lot less niche things. And then a year later, in 2007, we weren't in the financial crisis yet, although I would argue we were, but we didn't know we were. There's an important distinction there. But credit markets were definitely starting to implode.

And I at that point now had left and moved my whole business over to Morgan Stanley, had transferred over and so I was at a new Wall Street firm now and there were new platforms, new managers and new available options on the menu so to speak and so I had a lot of meetings that year in 2007. I think it was like a 10-day trip And if I remember correctly, I had like 40 meetings, including, you know, with clients like at nighttime. I do a dinner with a client every night and so forth. So anyways, then the next year was the financial crisis. OK, and so I spoke a lot about this. You can find it on our website. The link is in DividendCafe.com today. this. You can find it on our website. The link is in dividendcafe.com today. But I did this kind of series reminiscing from the moments in September and October that marked the actual 10-year anniversary of the financial crisis. I did this back at the 10-year anniversary in 2018. But in September, October of 08, I was in New York as, you know, some of these firms were going down and as the TARP vote was not happening and Wachovia was being sold to Citi one moment and Wells Fargo

another moment. And so there's this kind of real time, like play by play of what was going on then. And so I've already talked about that over the years. Some of you may have heard those talks in the past. Like I said, they're on our website. But that trip, you know, was really peculiar in the sense that you weren't going to kind of talk about, well, how is your floating rate bank loan fund done this year compared to your competitors? And what are you doing differently? And so it was more like who's staying in business, who's surviving? You know. We were right in the peak levels of credit markets imploding and equity markets imploding and banks imploding. And that was just a surreal trip, but nevertheless profoundly impactful in my understanding of the financial crisis and in my ability to absorb and personalize and apply the tremendous moments that were happening in history at that time and what was happening on behalf of our client for our clients.

that 2009, 10, 11, those kind of first three years after the financial crisis, this trip, coming out to New York, remember, I didn't have an apartment out here at the time. I didn't have an office at the time. I had a very successful business at Morgan Stanley. At that point, I had been a managing director at the firm for a couple of years. And so all that stuff was fine. We were growing a lot. We were growing more people on the team. But I'm saying in terms of my understanding of capital markets coming out of the GFC, I think those years changed my life. I think that that trip profoundly impacted the way that we do things at the Bonson Group. And what I will tell you, particularly those of you who are not clients of ours,

nobody saw the financial crisis coming. Some people thought housing was overpriced, but that's not what I mean. And nobody saw the implosion coming. Some people thought housing was overpriced, but that's not what I mean. And nobody saw the implosion of world credit markets. And it happened. And a lot of firms went out of business and a lot of firms should have gone out of business or could have gone out of business, came to the brink of coming out of business, including the one that employed me at the time, you know, was right there on the brink and through some heroic leadership saved the firm. But I'll tell you that I think a lot of people who manage money for clients in this business and in this society don't know what happened and don't care to know what happened because their things recovered. And they don't

even necessarily care to know why they recovered. There's a certain sort of gratitude, a certain sort of fideism, if you will, blind faith. And I became really quite zealous about not surrendering to those forces. I wanted to know what happened. I wanted to do anything I could do to prepare for things in the future. Now, one of the things I've really learned intellectually is that the greatest risks that happen to markets are things out of our control. Like, I don't believe I learned how to avoid it. I don't think I learned how to control it. But I did learn that I can't control it. And that's very different. And it's also very important because it causes you to have the

humility necessary to construct a portfolio. It causes you to be able to talk with a client the right way, to not lie to them, to not give them the impression that, yeah, there is this thing you can do, but you didn't do it. And that's why markets dropped a lot, or that's why your portfolio went down. At the end of the day, being able to be with some of the best and brightest minds in the world in the post-GFC era and understanding the exposure and the realities, the vulnerabilities that this business represents, that being an investor represents, it was really a very, very impactful time. But it did cause me to truly dive into risk management, into asset allocation, into monetary policy. to monetary policy.

The Fed was the primary story coming out of the great financial crisis. Whenever I say GFC, that's what I mean. The Fed's the big story in capital markets coming out of COVID, too. You know, there's two stories this year as to why a 36% drop in the month of March, in 31 days, February, March, recovered so quickly. And one of those stories is the Fed and the other one is the fundamentals. You know, COVID didn't, we got an idea of what COVID really was, not what we feared it was. And most of those things were a lot better than had been feared in the peak levels of March and April. Thank God.

So anyways, the trip evolved over the years. Our business was growing. I was in a lot of very memorable times. You know, I had a dinner with Ben Bernanke on one of these trips. I had a private roundtable with Steve Schwarzman, the founder and CEO of Blackstone. These are things like I'll never forget. And not just because they were iconic milestone moments, but they were, I learned a lot. I really did.

And I really continue to. And in 2014, still at Morgan Stanley, Brian Seitel, partner at Bonson Group, joined me on the trip for the first time. Dea Pernas, our managing director of our investment solutions, joined in 2015. At that point, we had left Morgan Stanley, and we were now our own independent business that now we had a whole wide open architecture, private equity, hedge funds, alternatives. And so it invited a lot more meetings, a lot of new partners, a lot of

different platforms, research providers. So it's just kind of this milieu of intellectual provocation. And I love it. I really do. So now in this moment, you know, we had to have some difficult meetings this week. There's some managers we had to ask hard questions of. And unlike any other year, I'm always in contact with our money managers. But since the COVID moment through before this week, I've had 37 meetings with money managers, phone and Zoom and other things building into this. OK, and then now we're looking as part of this Operation Magnify, we're expanding some of the investment solutions and the growth enhancement sleeve of our portfolio. We have a couple strategies that we're potentially looking to maybe change.

So we restructured the way we're viewing bonds by separating out credit from boring bonds. That required different meetings and different managers. So there was a lot on the agenda this week. And I think the thing I want to leave you with as you're listening is that on the practical level, logistical level, this fund coming into the portfolio, this manager leaving our menu, this new structure in our portfolio construction. All of that's really important. We did a lot of work for it. I think we made some really good decisions and I wouldn't belittle any of it. I'm very proud of our process. I'm positive that we are doing the extra work, the extra diligence to deliver results that will help our clients meet their financial goals. And yet, I think the most important thing I will

tell you coming out of this week is the reiteration of things that are lessons that I've been evolving with and learning over the entirety of my career, not just since GFC, certainly not just since COVID, and not even since these trips started, you know, back in 06 or what have you. But I mean, even earlier than that, there's been this kind of intellectual journey. And yet, all of the things I learned build upon principles that I believe are so important for those of you who are clients of the Bonson Group. We are a goals-based asset allocator. We are not running a derby whereby we say our job is to take a human being who has nuance. They have goals. They have particulars.

They have specific things. Sometimes there's a client who goes through a divorce, a death in their family. They sometimes go into a windfall of new money. They sometimes have life-changing events financially that are positive, other times that are negative. They're human beings with all these moving parts. And for us to say, well, our goal is to see to it that the things we do in their portfolio, that if we ever had to sell it in a month or a week or a quarter or three months or whatever, that we'd be selling it at a higher price than what this index that isn't a human being with goals and nuance, what that price would be. It's a preposterous way to think about managing money.

It's a preposterous way to think about managing clients and people, human beings. And so the notion of looking at cash flow generative investments and someone saying, well, is this stock that you love that's paying a dividend, is it going to go up this price in this month or that month? And me saying, I don't know. That's the right answer. I am focused on if that's growing its cash flow or not. If I get that right, the rest is going to take care of itself. I'm going to be able to apply it in the right way to a human being who has financial goals, which, by the way, are generally goals related to cash flow.

I think there's some people whose goal might be just to kind of brag and say, I was up this and my friend was up that or I was up this, index was up that. But it's pretty shallow. I don't think it's real. I think that that's even then masking real goals. People have financial goals that have to be applied in the context of their lives, a holistic portfolio. And when I sit with structured credit money managers this week, structured credit money managers this week. And they say, we don't want to hire people that tell us we're coming in to buy something low and sell it high. And the reason why is because we don't think we can do it and we know they can't do it. We want them to talk to us about cash flow generation and sustainability and growth and durability and preservation of that.

And then let the other things take care of themselves. So to the extent that we're focused on cash flow generative investments, certain philosophical tenets of how money compounds over time, and how to go about applying that with various illiquidity, with idiosyncratic strategies, with diversification, with global exposures, all the things that we have to try to do in the private wealth world. That's the stuff that we're focused on. That's the stuff our partners out here in the city are focused on, whether they be hedge

funds, alternatives, goals-based portfolio management. And they have different clients. They have different goals. They have a different kind of role in the supply chain, if you will. But my point is that we are seeking out people who are philosophically aligned. So when we talk to small cap managers in the equity side or private equity managers. And they say to us, we can't predict the prices of our holdings are going to do. I don't go, oh, well, I'm sorry, I need someone who

will. I say, okay, keep talking. This is what I want to hear. And they say, we have a process where we want to be able to invest in the predictability of earnings growth and the durability of a business model. OK, that gets us going. That's what we believe in. And when we talk to macro people and they talk about the context of investing in a zero interest rate world versus worlds of old, world of the future, do we get a reflation trade back on? Where do things stand in the overall debt environment? What are the disinflationary forces that we're facing? What does that mean for alternative investments as an allocation in your portfolio? Where are there crowded trades? What are the things that seem smart that everyone's already doing that really represent a buildup of risk in a portfolio?

So the macro people, the research, dividend growth, small cap emerging markets, private equity, all of this stuff. Fitting into a process of the bond signal for the purpose of us delivering on financial goals for our clients. They're being able to play some role in the contentment of their lives. That's what people hire us for. It's been a great week. I hope all this makes sense. I hope you can see how we piece these things together at our firm. Thank you so much for listening to this podcast and for watching this video and reach out with any questions anytime.

And we'll be back at you next week. I'll be back in California. Look forward to it. Take care. The Bonson Group is a group of investment professionals registered with Hightower Thank you. to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced.

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