The Quest for Performance

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A MOST hotly debated subject in investment circles these days is whether performance is being sought at the risk of collapse. It is surprising how little study and written comment has appeared to help clarify this issue between the wise old owls and the eager young men. A great deal has been said about the importance of institutional investors in the stock market but very little of the discussion deals with the importance of what kind of institutional investor and how he invests. There have been some mathematical analyses showing the efficacy of performance and its relationship to turnover, aggressiveness of objectives and the like, but motivation is overlooked. This brief article will discuss some of the more fundamental differences between the schools of invest-andretain and what might be called the What have you done for me lately? aggressive approach. It will be contended here that there are a great many hidden side effects of these new patterns of investing, that there are influences on shareholders and management of every corporation and certainly of every mutual fund and pension fund, that indeed there are risks in this concentration of effort, but that the process of emergence of higher performance standards is a natural one reflecting the changing of the generations in the financial world. The investment fraternity suffered more than most from the depression and war years. During that time, there were few recruits to the study, merchandising, or management of corporate securities. From the early 1930's until the early 1950's, the fraternity was depleted in its manpower, its talent, relative attractiveness and general reputation as a career and an industry. This has meant that the dominant figures of the 1920's, 30's, and 40's held onto their posts longer with less competition than is likely to be repeated in our time. It seems that it is only in the 1960's that younger men are taking the helm of important institutions and directing policies which are based on a full realization of the sweeping changes in the nature of our socio economic arrangements, the markets, the regulating bodies, and the experience of the new investor. They are ready to break with tradition for they have no vested interests. They comprehend the computer, the third market, and the forces of research and obsolescence. They are extremely mobile and aware of changing investment values as a result of the shrinkage of the country and the world through jet transportation, xerography by wire, and constant communication with the new generation of corporate and government leaders. The first point then is simply this: that the improved performance of certain institutions in the management of their funds is the natural outcome of better trained, more energetic, younger men in command. Once this is accepted, it follows that everyone should realize that the markets and the standards are permanently changed. This is not to say that they will not change again but it is to claim that this is no fad. Let us proceed to look then at some of the effects to be expected from this permanent change and some of the arguments about these effects. In trade circles it is commonly heard that some dire result will be seen of the concentration of so much buying power in favorite issues. It is never mentioned that there might be a favorable effect of the concentration of buying power in favorite issues. To wit, many of us have seen the phenomenon of the neglected issue. This is often a euphemism for wish somebody would agree that I am right, but less facetiously, it has often been true that new developments have been unrecognized for