In a casual chat after a round of golf, my friend, Ashok Vaish, offered a clue to choosing money mangers successfully.
After arriving from India, earning his doctorate at Berkeley and then building two engineering companies from scratch to a combined total of more than 1,000 employees, he said the one constant predictor of future success in a job-applicant engineer was their grade point average in college.
Occasionally, he said, someone with less than great grades would succeed with his company, but it was the exception rather than the rule. Good grades were "without exception" a predictor of success for young engineers.
It sure made me wonder about people like President Bush and myself who made it through Ivy League schools with primarily what were known then as "Gentlemen's Cs." Since then, we've both enjoyed varying degrees of accomplishment in spite of our desultory approach to academics.
Successful companies like Enterprise Rental Car have made it a practice to hire employees who were not necessarily outstanding collegiate scholars because they do by far the best job at running the nation's most successful rental operation.
Ernest Hemingway said, "Some intellectuals are the dumbest people I know."
So what do we look for in a money manager? A recent study mentioned in Mark Hulbert's New York Times column Sunday calculates that hedge fund operators with the best results were the ones who went to colleges that had the highest average SAT scores. Does that mean they were smarter, or they were just better connected and able to gain access to better information?
Unfortunately, the study was conducted on hedge funds, which, as a group, have not come close to beating stock market averages over the years (with average annual returns of just 6 percent).
It would be nice to know if this information is relevant where it would mean something for us -- namely, in the comparison of mutual fund results.
According to the same survey, mutual fund managers coming from colleges with low SAT scores did just as well as the "smart" people. So where does that leave us when we're trying to anticipate prospective superior results and choose mutual funds that will beat their competitors.
Leave it to a Polish researcher to come up with the answer. Martin Kacperczyk, now of the University of British Columbia, has determined that a concentration of assets allowing a money manager to focus on just a small universe of companies appears to be a single common denominator of future success.
Warren Buffett certainly falls into that camp, but I also recalled the famous Janus Twenty fund that eclipsed most of its competitors in the '90s. It is back today with a five-star rating utilizing the same concentration approach.
Now it is focused on 39 companies rather than just the 20 stocks it once maintained as a limiting factor. Since its inception in 1985, it has averaged 13.65 percent per year, and its current manager has been running the fund for nine years. Bob Brinker's most aggressive timing model, by comparison, has averaged approximately 14.75 percent since 1988 -- just to give us some perspective.
Meanwhile, the S&P 500 index has averaged approximately 11.2 percent over roughly the same period.
Kacperczyk also adopted a technique called the "Return Gap" which is a comparison of stocks purchased versus the rate of return had the stocks been left untouched from quarter to quarter. In other words, this was a measure of the value added by the manager's efforts.
Managers with higher past return-gap figures generated better subsequent results than average.
To summarize, I think this research indicates that smart people, focused enough to get good grades, have figured out that you contribute more value-added benefit when you concentrate on a small universe of investments.
It's called "having all your eggs in one basket and watching that basket very carefully."
Those who would get bored by such limitations and who then over-diversify, are probably the same ones who sat in the back of the class letting their minds wander.
Regular readers will recall that I generally recommend a spread of assets over different asset classes -- but with each asset class being managed by the smartest people we can find. I call it "quality diversification."