Below are some excellent notes about a keynote speech Baupost's legendary Seth Klarman gave to the Boston Security Analysts Society last week.
He discussed several timely topics including the short termism of most investment professionals and why the incentive system is set-up to drive them in that silly direction:
Klarman first addressed a fundamental conflict within the investment management industry that he said is at odds with investor objectives.Klarman talks about how he addressed this at Baupost by being as selective about his clients as they are about him.
Investment managers, such as pensions and endowments, exist in perpetuity and should be focused on long-term wealth creation. Yet performance is almost universally evaluated using short-term results – managers are compared using quarterly, monthly, or even daily returns, creating extreme short-term pressures. “Managers who do well in the short term are rewarded with more assets,” he said. “Those who do not do well in the short term often don’t survive to see the long term.”
“Money managers know the Sword of Damocles is poised to fall on them next,” he added, which forces them to sacrifice long-term wealth creation to pursue short-term gains.
Of course, he also addressed the current rally which he said perfectly fits the description of a classic bear market rally. While fitting the description does not definitively mean it is a sucker's rally, it improves the likelihood. In the end, it does not concern him one way or another as he endeavors to focus on what he can control, which is making sure he maximizes the price to value gap.
As to his macro worries, he stated he's put on "massive" portfolio protection via rate caps and swaptions. He also agrees with TILB's long-time worry that TIPS will not provide satisfactory inflation protection as the people that pay you are the same people that measure inflation - they cannot be trusted.
Finally, he talks about the government's actions creating the "mother of all moral hazards."
Enjoy.
Seth Klarman - Why Most Investment Managers Have It Backwards 6-09
