Thoughts about Asset Manager Pedigree

What accounts for the fame of Andy Warhol and the worth of the works that carry his signature?

Warhol was an influential figure in the history of art, who, according to Wikipedia, explored “the relationship between artistic expression, advertising, and celebrity culture.”  As Tim Harford pointed out in a 2022 posting, “Warhol loved to play with ideas of originality and authorship.”

Harford’s piece concerned some prints made by Warhol’s assistant, Gerard Malanga, who, Warhol freely admitted, “did a lot of my paintings.”  A later podcast about “Andy Warhol’s Factory of Truth” featured a conversation between Harford and Alice Sherwood, the author of the book Authenticity.  It provided more detail and context regarding the story of one set of Malanga/Warhol paintings — and about issues of authorship and reputation and how value is created.

Such considerations are important for anyone investing in art, but our goal here is not that pursuit.  Rather, it is to apply the concepts to the analysis and selection of money managers.

Authenticity

In the podcast, Sherwood explained that there are “nine levels of authenticity for a picture.”  She said that even for the works of Old Masters, “We have to deduce how much were they actually involved,” using Rubens as an example of an artist whose contribution to a work associated with him varied considerably.

The highest level of authenticity for a painting is one being made from start to finish by the artist whose name is on it.  A work “from the studio of” the artist means that it was mostly created by a student, with touchups by the Old Master himself.  (Other categories include “from the circle of” or “in the manner of” that are used to define lesser connections to the artist.  Here’s a more expansive list of attribution terms.)

Warhol disconnected the hands-on execution of a piece of art from the conceptualization of it.  As Harford wrote, “In principle, the entire process, from photograph to signature, could take place without Warhol ever touching the work.  Evidently that was part of Warhol’s point.”

Another aspect of the valuation of a work of art is its provenance.  Since that concept seemed somewhat related to the notion of “pedigree” so commonly cited in the investment world, a question was put to Claude (the AI chatbot from Anthropic), which returned several helpful paragraphs in response, which ended:

In summary, provenance provides the factual chain of ownership, location and expert opinion supporting authenticity.  Pedigree specifically assesses the reputation and prominence of the authorities involved to further reinforce cultural value and importance.  The combination paints a complete picture of validity and renown.

Provenance offers credibility, while pedigree confers social status and gravitas.  Establishing both makes a powerful statement of authenticity and clout in the art world.  They combine hard facts with elevated opinion to justify an artwork’s valuation aesthetically and financially.

(Tapping AI for inspiration seemed appropriate, since authenticity and authorship questions abound in that realm too.  There was no indication of the sources Claude used for the output — which was well structured and reasoned — or whether parts of it should have been in quotation marks.)

While the valuation of an individual piece of art is quite different than the evaluation of an asset manager, the concepts outlined above — authorship, authenticity, provenance, pedigree — come into play.

Copycats

For starters, it’s worth noting that copying what others are doing is common practice in the investment industry; appropriating successful ideas, techniques, and strategies ought to appear as a key element in the descriptions of investment process of most organizations.  But that’s rarely the case.  Instead, the word “proprietary” is often thrown around, even when there’s nothing vaguely proprietary going on.  (A random look at the “what makes us different” sections of manager websites illustrates that point.)

On the other hand, some people and firms are proud to declare their fealty to the principles of successful investors and their willingness to copy them.  Quotes from those copied are offered in presentations and letters.  Buffett and Munger are featured more than anyone else, although executing their playbook is daunting if not impossible for those who don’t get the first call on deals, don’t have a sizable pool of cheap capital, and don’t have the luxury of patient investors behind them when navigating the inevitable twists and turns of markets (and their own unforced errors).

Investing in “the manner of” gurus might seem straightforward on paper but is not easy in practice.  There are certainly strategies worthy of emulation, but it is necessary to adapt and extend them based upon the available resources and the particular circumstances at hand.  In that way, important precepts can go beyond slavish application (or use as empty narrative devices) to become the foundation of new possibilities.

Pedigree

Allocators often talk about pedigree — in some cases it’s even stated as one of the many Ps in their manager selection process — so what is it, anyway?  Background?  Track record?  Reputation?

And, are we talking about individuals or organizations?

Yes, all of the above, with a thick layer of “cultural value,” the acknowledgement by the crowd of investment acumen and status.

For individuals, it is some combination of where you went to school, what organizations you worked at, the legendary market mavens that you interacted with, and the performance that you can cite.

In cases where an individual and organization seem to be one (as with a single-manager hedge fund, for example), the pedigree of the person is that of the entity.

Large organizations (or small ones where more than one person is viewed as instrumental) try to signal the quality of the team through their backgrounds.  Firms are more attractive to allocators if the résumés of the people involved are filled with various degrees from Ivies or near-Ivies and years of experience at leading investment banks or asset management firms.  Sometimes logos of those places are used for extra effect in marketing materials.

Any direct connection to a recognized investment star in one’s background is worth extra points; an apparently close relationship provides a multiplier.  And performance matters the most — assessments of pedigree correlate closely with track records.

Authorship and ownership

Which brings us to a question.  How can we judge these elements and how should we value them?

In any organization of more than one person, apportioning credit for a track record is tricky.  From the outside, it is hard to tell who adds value (although good due diligence analysts try to ascertain that).

Who are the recognized authors of the performance record?  It depends.  Usually the lead person, maybe the team or key players together, maybe the organization.  Who “owns” the record?  Typically the organization, yet everyone involved will try to claim it or bask in it in one way or another.

Thinking back to Warhol, it is worth considering the division of labor between the conceptualization of an investment approach and the execution of it.  Each matters.  Do we care who made what contribution?  Perhaps not so long as a group stays working together, but when the inevitable splits occur, how do pedigree points get awarded?

Progeny

There are many different ways that people spin out of organizations to create new asset management firms or join existing ones.  They can start their own firm from scratch, in rare cases with assistance from their former one, but usually by leveraging their own connections.  And there are lift-outs of teams from one established firm to another.

The most famous investment family tree sprouted from Julian Robertson’s Tiger Management.  (An extensive list of Tiger Cubs, Tiger Seeds, Tiger Grand Cubs, and Tiger Great-Grand Cubs can be found here.)  Being a part of that collection — being grouped under that name — is a great example of how pedigree propagates.

To analyze the process of how that occurred — and how predictive being a part of that lineage is of subsequent success — is beyond the scope of this posting.  (Note that there is a column in the list showing whether a firm is active or inactive.  It’s impossible to avoid seeing the infamous Archegos, since it comes first alphabetically among the Cubs.)  But we can pose some general questions:

How much should working directly with Robertson matter?

In what kinds of capacities and for how long?

What does seed capital from him indicate, for those whom he knew from their time at Tiger, and for those who were outsiders?

How good was he at identifying talent?

Who was chosen to receive his blessing and why?  (Who was not?)

How good was he at training investors for the range of possible future environments?

Was he making portfolio bets, knowing that only some of the choices would turn out to be winners?

Another domain where pedigree is highly prized:  animals.  From livestock at state fairs to dogs at Westminster to horses* at the track, there is a belief that genetic attributes are passed from generation to generation.

That isn’t a concern for investors.  Even when vetting a scion of an asset management pioneer who is taking the reins, it comes down to what someone has learned from the master and whether they have the temperament to apply those learnings as conditions change.

Truth be told, a lot of portfolio managers are lousy teachers.  They expect their natural skills to rub off by osmosis and their way of investing to work no matter what — not recognizing that others will need to go through evolutions of their own rather than execute a playbook that has been passed down to them.

Something special?

All of this (and more) has to be sorted out to see whether there is something special that gets transferred — a secret sauce of sorts — or whether we are being seduced by the reflected glow of success.

For allocators who must seek the approval of others to get their ideas used, pedigree is an easy sell.  Whether the process involves convincing a chief investment officer or an investment committee that a recommendation should be given the green light and/or marketing a pick to institutions or individuals for their portfolios, playing the pedigree card can be very effective — but far too simplistic.

Many new firms (or lift-outs migrating to a new firm) struggle and even fail because people have been removed from the environment in which they thrived.  Much of what appeared to be their own success was attributable to the organization of which they had been a part.  Those who have starred in one show in a supporting role may bomb in another when they assume the lead, because they don’t understand what it takes to mount the whole production and they venture outside their circle of competence rather than building a sustainable organization.

In all of this, there is a big status game going on.  Stripping the superfluous elements of that out of the decision making process is essential.

 

* The “manager characteristics” module of the Advanced Due Diligence and Manager Selection course uses the analysis of thoroughbred horses as an analogy to asset managers in order to examine the concept of pedigree.