Just because you think it’s a good idea, it doesn’t mean everyone will. That was the hard lesson that portfolio manager John Gottfurcht learned when he set up his own shop in 1973.
For those either too old or too young to remember, January 1973 marked the start of a two year bear market – the Dow lost 45% over that period, during which there was also the first oil shock and the small matter of an impeachment process against president Richard Nixon.
Even so, Gottfurcht thought this situation might play in his favor as he started SSI Investment Management – a boutique specializing in convertibles, then a relatively uncommon niche. After one year, he had numbers to vindicate his gamble too, returning 17% at a time when many investors were struggling just to stay in the black.
However, during times of trouble investors tend not to turn to the new and the unorthodox.
‘The first year we went into business was a year that was every bit as bad as 2008,’ Gottfurcht said. ‘We had a huge spike in energy prices and cars were lined up blocks-long to fill their gas tanks.’
‘We assumed the world would beat a path to our door but that didn’t happen. The idea of having a short portfolio mitigate the risk of a long portfolio, or using convertibles in lieu of longs was actually considered quite speculative rather than risk-controlled. But we stuck to our knitting.’
Still going strong
Today, the firm manages $1.6 billion in assets and has 36 employees. The business is partner- and staff-owned, with stock and options granted to employees as an incentive.
The firm’s 13 investment professionals have an average tenure of 19 years, which is partly down to the fact that Gottfurcht likes to groom portfolio managers in-house, rather than hire established names from other firms.
‘For the bulk of our portfolio managers, in many cases, this was either their first job out of college or their first job after getting their MBA,’ he said.
‘We feel that it’s easier and better for us to groom them in the style that George directs for us, which is a combination of using quant work along with diligent fundamental research.’
The George he refers to is SSI’s chief investment officer, George M. Douglas.
Under Douglas, SSI offers six strategies:
- Hedge Convertibles
- Convertible Investment
- Investment Grade Convertibles
- Flexible Allocation
- Core Equity
All six strategies aim to uphold the firm’s founding principles: safety, consistency, good returns and the preservation of capital.
Across all of its convertibles strategies, the investment team starts with the entire eligible market and ranks securities according to the risk and reward balance, upside participation and downside protection.
They do this with a quantitative screen which measures the delta for the common stock of convertibles within the pool. They underweight a convertible if it begins trading at 150% of par value and if its stock does well.
The team then uses more quantitative measures to narrow down the universe even further, before turning to fundamental research, including calls with management around new issuances.
‘Something that’s different from the equity market is that the convertible market experiences a fair amount of new issuances per year. 20% to 25% of the market is turning over in the sense of new issuances,’ Douglas said.
‘We’re constantly on conference calls with management of companies that are offering new security offerings of convertibles to the market.’
The conservative nature of the strategies means that the managers prefer stocks and bonds in more mature companies, as they look to deliver on their aim of ‘not getting rich, but staying rich.’
This defensive approach means they are less worried than pure equity or bond managers might be by the prospect of the current business cycle coming to an end.
‘The whole goal of not necessarily getting rich but staying rich allows us to shift our portfolio and adjust our portfolio regardless of the environment,’ Gottfurcht said.
‘If for some reason there is an unforeseen random event, which could come along at any time, we feel that the portfolios can weather that nicely.’
Having survived 1973, it’s not as if they are lacking experience.