Learning about the people and ideas that were instrumental in the development of practices in different parts of the investment ecosystem helps us to evaluate where we are now. Why did things develop as they did? What are the important mileposts on the road to this point? Are there assumptions and norms that were formed along the way that have outlived their usefulness?
For one important part of the investment business, a book by Richard Ennis, Never Bullshit the Client, is a good place to start. The subtitle is “My life in investment consulting.” It is both a personal memoir and the story of the rise of an influential group of advisors to institutional asset owners.
One of the blurbs for the book came from Larry Siegel, who wrote that “Richard Ennis was present at the creation: O’Brien Associates and then A. G. Becker, which in the 1970s were the gathering spots for most of the people who created the modern scientific investment management business.” Ennis then went on to cofound one of the leading investment consulting firms.
Beginnings
Ennis started as an intern at Transamerica Fund Management, working for one of the “gunslingers” who bought the story stocks of the day. He was thrust into the work without much training, as was normally the case at the time, well before money management became an in-demand career. It was the era of the Nifty Fifty: “Perhaps the most telling label for these darlings was one-decision stocks.”
He also was an early participant in the CFA program (with a charter number in the low four digits) and was “wined and dined by institutional stockbrokers” who coveted the firm’s trade flows, which were especially lucrative before fixed commissions were banned in 1975.
Along the way, Ennis became acquainted with John O’Brien and Dennis Tito, who are among the many seminal figures in the development of the investment industry to make appearances in the book. In 1972, he joined them at O’Brien Associates, which “was never more than a very small firm,” but “it proved to be a veritable tidal pool of talent,” which included people like David Booth and Gifford Fong.
During this “transformative period” for the industry, the firm was a leader in teaching others about capital market theory, risk-adjusted performance measurement, portfolio optimization, and pension investment modeling — and it developed the first total stock market index. The principals interacted with the academics who had created the foundations of quantitative finance, turning their theories into practice.
Becker
Tito and O’Brien had a falling out. Tito went on to create Wilshire Associates and O’Brien joined A. G. Becker, as did Booth, Ennis, and others. As Ennis wrote, “Becker is widely and rightly regarded as the birthplace of institutional investment consulting.” That’s where peer performance reporting had come into being, a business Becker dominated.
Jim Knupp and Ennis were charged with extending the client relationships that existed by moving Becker into the field of investment policy advisory services, which were just starting to be offered by other firms. The two led with pension modeling, then added investment manager evaluation and other capabilities.
Soon enough Becker, whose main business was securities brokerage, found that money managers would limit their trading at the firm if they didn’t think their products were being promoted by the consulting group. That stoked Ennis’ interest in creating a firm that was independent of those pressures.
EnnisKnupp
At the end of 1980, Ennis, Knupp, and Ron Gold left Becker to create a new firm that would eventually be known as EnnisKnupp. It was one of the leading institutional consultants during three formative decades when many practices that frame today’s investment landscape coalesced. (On the other hand, changes in ownership and priorities led to Becker’s consulting arm being sold to SEI in 1983, triggering a diaspora of talent to a number of other firms that became influential players in the industry.)
The work at EnnisKnupp was first concerned with matters of investment policy, helping clients with asset allocation. Ennis saw (and continues to see today) “a remarkable and enduring degree of confusion on the subject, including on the part of fiduciaries charged with investing the assets.” Those fiduciaries aren’t the bearers of the risk of the portfolio, and are subject to conflicts, fads, bad advice, and peer pressure from other institutions. In addition to providing investment policy advice, EnnisKnupp was hired to set up an investment management structure, select asset managers, and monitor them and the overall performance of the plan.
The pools of capital to be invested were from different kinds of clients: corporations, foundations, educational endowments, cities and states, unions, religious institutions, hospitals, and nonprofit organizations. Each had their own traditions, cultures, and legal constraints.
Over time, many of the independent consulting firms that flourished during the rise of institutional investment management were purchased by competitors. EnnisKnupp was bought by Hewitt Associates in 2010, virtually at the same time Hewitt itself was being purchased by Aon. (Richard Ennis retired.) The consolidation of firms intensified over the ensuing decade, although a planned merger between Aon and Willis Towers Watson was called off for regulatory reasons in 2021. That decade also saw the OCIO model explode in popularity, fundamentally changing the consulting industry.
Beliefs
The foundational beliefs of EnnisKnupp come out in the book. Among them:
Ethics. Ennis would preach a McKinsey maxim — “Put clients’ interests first, the firm’s second, and personal interests third” — to new employees, before adding his own adage that became his book’s title: “Never bullshit the client.”
Training and development. EnnisKnupp “felt strongly about training people ourselves,” mostly hiring them out of college, enrolling them in the CFA program and encouraging them to get an MBA, training them in business etiquette, and having them work their way through the jobs at the firm from the ground up. The new hires also received books on writing well. There was a coaching program — and junior employees rated senior ones on their ability and willingness to help in their development. Ennis wrote that “it took about seven years to turn out a fully prepared, client-facing consultant.” Given the attention and cost of the programs at the firm, someone there said, “It seems our main business is developing human talent and we earn consulting fees on the side.”
Sales. A short section in the book highlights the value of not doing what everyone else does when trying to win new business. Almost everyone making pitches follows the same template; doing things differently will get you noticed.
Independence. The willingness to stand apart also becomes evident in the trends that you buck, the popular approaches of the day that you eschew. For example, consulting firms were most often paid via soft dollars, through a broker who executed client trades for that purpose. In contrast, EnnisKnupp asked for direct cash payments, which must have cost it business, since it was more palatable for many prospective clients to have those funds paid via the commission budget, which wasn’t scrutinized to the same degree as regular expenses.
Clarity and consistency. No one reading Ennis’ book or his other writings would accuse him of being vague or inconsistent. His beliefs are evident. He wrote that “the only thing worse than smoke and mirrors in consulting is the consultant that blows in the wind.”
Ennis covered many important industry debates and developments in the book, making clear where his beliefs diverged from those common in the industry. In addition to the ideas appearing in the main text, there is an appendix summarizing “a heuristic approach to investment policy” and one made up of selected editorials during his time as editor of the Financial Analysts Journal.
Advisory themes. EnnisKnupp was early in recommending meaningful allocations to passive approaches. It also warned about the over-diversification of asset managers, which Ennis termed “insidious and wasteful.” The cure for closet indexing (by individual managers and across a portfolio) is “fewer managers, more concentrated managers, more indexing or a combination of the three. This was our prescription.”
Manager selection. Ennis did not hide his skepticism about the ability of asset managers to outperform or the ability of investment consultants and others to choose them wisely:
The comparatively modest fees you collect for manager search work are testimony to the fact that neither client nor consultant has confidence in the latter’s ability — or anyone else’s, for that matter — to pick market-beating managers.
There will always be clients who are “hopeful about the potential of active investing;” Ennis stressed the importance of being candid with them about the possibilities (rather than claiming the ability to select winners, as most do), so that everyone proceeds with proper expectations. (In an email interview, Ennis wrote, “The consultants have never been able to help clients pick winning managers and remain in denial about it to this day.”)
Simplicity. Ennis imagined that if he had started another firm instead of retiring, he would have called it Occam Asset Management, with a simple and cheap allocation scheme, using three passive vehicles and avoiding “the black art of portfolio ‘optimization’ and other forms of asset-allocation modeling.” The idea was to strip away everything other than the core responsibility of building the long-term exposures needed to deliver appropriate returns to those bearing the risk.
Where to begin. In formulating investment policy, Ennis believes you should start by understanding where a client is coming from, since “every investor’s risk exposure evolves over time in a context that has relevance to the investor”:
This is not to suggest I will cleave to the past. But I want to know where the analyst that preceded me left off and to acknowledge the policy to which the investor has become accustomed.
Following the herd. There are obvious herding tendencies among classes of institutional investors. “The less advantaged from a competitive standpoint feel pressure to play the game of the advantaged,” even if they don’t have the same kinds of resources or chances for success. That certainly has been the case with “the endowment model,” which has expanded well beyond the original confines that gave it its name. In a call for papers in one of his editorials, Ennis posed a question about how trends develop and norms synthesize in the investment world:
If a class of funds occupies a distinct investment policy habitat, irrespective of variation in circumstance, what accounts for the selection of habitat? In other words, how does the herd determine where to locate itself?
Coming attractions
Since writing his book, Richard Ennis has authored a series of articles addressing what he sees as the pressing issues for asset owners today, especially regarding the assumptions underlying the incredible herding into alternative investments. The next posting will dive into those issues and the questions that institutional investors, now grazing in a much more complex habitat than they ever have before, should be answering.
Published: December 6, 2023
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