The active manager cannot control his own destiny in times of high market correlation, but when correlation is a normal 26% - or lower - he can “hammer” the market.  Correlation is the degree that different securities move together in tandem.  The norm of 26% goes back close to a hundred years.  Sudden increases in correlation are always related to macro events.  The crashes of 1929 and 2008 are examples.  Both happened because of too much debt; stocks at 10% margin houses at 5%.  High correlation existed from 1928 till 1939.  Current high correlation has persisted from 2007 to 2018.  BOTH were 12 year periods.  Since the latest period, billions have been taken from active management and placed in index funds and ETFs, which has only increased correlation.  In the meantime, this nine year secular bull market is still influenced daily by macro events such as trade tariffs, interest rates etc.

This all came to mind recently when I happened to Google a long-time friend, Joe Mc Nay.  Joe and I met by chance over 50 years ago at a crosswalk behind the Fidelity Investments building.  The traffic was so bad we couldn’t cross the street and so we started talking.  At that time, he was working for The Massachusetts Company managing Benjamin Franklin’s family trust (only in Boston).  Joe – like most portfolio managers – was originally a stock analyst.  To be specific, he was a drug company analyst.  But unlike other analysts, he wasn’t especially interested in established drug companies.  His focus was on new companies and NEW drugs.  He found “the mother of them” all – Syntex.  It was a small drug company in Panama that created the birth control pill and launched his career.   After graduating from the Wharton School of Business, Joe had gone to work at The Old Colony Trust Company.  At the time it was a subsidiary of The Bank of Boston and the citadel of old Boston money.  He convinced the bank to buy one million shares of Syntex at $17.  They sold it six months later for $600 … a return of 35X.  Going forward, Joe would always focus on entrepreneurially run new companies.  It was a focus that ultimately would make him and his clients extraordinarily rich.      

Forty plus years later, we reconnected at an investment conference in Vermont.  Joe was the featured speaker.  By then, unlike me, he was famous.  He had started Endowment Management with Roland Grimm who previously had been at Fidelity Investments.  Yale University Endowment was their first client.  After some years of managing college endowments they sold the firm to Baring Brothers.  Then in 1976 Joe founded Essex Management.  At its peak, it had 23 billion under management.  Joe owned the whole firm.  We reconnected again shortly after the bear market of 2000-2003.   As Bill Noonan and I were leaving his office, he walked us to the elevator and as the door was closing said, “If I buy your research (he did) your job is to protect my a … !”  He clearly believed – and still does – in a sell discipline.

Joe’s talent or aptitude for the stock market was recognized when he was a student at Yale.  His class of 1954 decided to give him their class donation of $370,000 to manage as he saw fit for 25 years.  They wouldn’t touch or interfere with it in any way.  25 years later, the class of 1954 gave Yale a check for over $90,000,000.  That was a return of 24.6% a year!  Correlation for those 25 years stayed well below its historic 26% average.  The long wave was in an upswing during the 1950s and 60s much as it is now.

Francis Patrick Boland