Today it is difficult to imagine an active portfolio manager having the aura of a rock star.  But in a period of rising interest rates (1945-1982) it did happen and will happen again.  After all, who wouldn’t regard someone with respect who could make them money by outperforming the stock market?  Today the common wisdom is that it can’t be done and one should buy ETFs (exchange traded funds).  Not appreciated is that rising interest rates can reflect prosperity while declining interest rates often reflect economic difficulty.  

In 1965 I had the good fortune to meet and learn from the star mutual fund manager of the time, H. Alden Johnson. “Augie” was the senior partner and president of Mass Financial Services in Boston.   His personality projected an aura of power.  At the time he was also the portfolio manager of its premier mutual fund, Mass Investors Trust.  The fund was the oldest in the country.  For whatever reason, he seemed to like me.  I was twenty-one and he was, perhaps, fifty.  Golf and the investment business gave us two things in common despite our age difference.  I definitely viewed Augie Johnson as a role model.

The man was smart, hard working and had a strong personality.  I remember my first visit to his corner office on the top floor of the John Hancock building.  It was the highest building in Boston.  The office was strewn with books, charts and Wall Street research.  He was a voracious reader.  This is a trait I’ve learned that all good money managers have in common.   From their perspective, they can never have enough information.   It is from that information that they make their CONCEPTUAL investment judgments.

I remember one morning picking up Peter Lynch, then the Magellan Fund manager, (we live in the same town) at a bus stop.  As soon as he was in the car he opened his briefcase and started to read for the hour drive to Boston.  I was not in the least offended.  Taking a bus was a deliberate choice for him; riding gave him an extra two hours a day to read.  Later Fidelity would send a limousine for him.  But in 1965, H. Alden Johnson was definitely the center of power in the mutual fund universe.

It was ten years later that John Bogle would start his index fund.  At the time it was his only option.  Bogle had been an active manager at Wellington Management and left only to later realize he had signed a non-compete contract.  On advice of counsel, he started an index fund so as not to be competitive with Wellington Management.  Thus passive “management” was born starting the commoditization of stocks.  Microsoft was started in 1975.  Does anyone believe it represented the same investment opportunity as the S&P 500?  Of course not!  In the same time frame there was Wal-Mart and McDonalds.  Today we may have similar situations with innovative companies particularly within the technology, health care, automobile, and online retail industries.  It is the active manager’s role to find them.  The supposed “benefit” of index funds and ETFs is their low cost.  But as a friend of mine said recently, “The easiest way to lose money is to buy the cheap thing.”

-Francis Patrick Boland