And then it all went wrong.
The bellwether for a spectacular decline was the launch of the TIME fund. TIME stood for Technology, Internet, Media and Entertainment. The launch date I believe was 14 March 2000, the exact date the NASDAQ peaked. Here is an article from May 2000 expecting 15-20 percent annual returns.
It did not work out quite that well.
As the 2003 Form 10K for Principal says:
On October 31, 2002, we sold substantially all of BT Financial Group to Westpac Banking Corporation ("Westpac") for proceeds of A$900.0 million Australian dollars ("A$") (U.S. $499.4 million), and future contingent proceeds in 2004 of up to A$150.0 million (approximately U.S. $80.0 million). The contingent proceeds will be based on Westpac's future success in growing retail funds under management.
The decision to sell BT Financial Group was made with a view toward focusing our resources, executing on core strategic priorities and meeting shareholder expectations. Changing market dynamics since our acquisition of BT Financial Group, including industry consolidation, led us to conclude that the interests of The Principal shareholders, BT Financial Group clients and staff would be best served under Westpac's ownership.
Westpac later largely closed the funds management part of the business.
In three years the business was largely destroyed along with the career and reputation of the then Principal CEO.
The "retrospectoscope"* is a fine instrument - but it is still obvious what happened. BT launched a tech fund at the height of the dot-com boom because it was easy to sell. They put "sexy" dot-com stocks in their portfolio because they made the product easier to sell. And they burnt their clients beyond a cinder of recognition.
Pretty it was not.
They did it because they got led by their sales force. If you do what the sales force wants and you have a competent sales force you will sell lots of funds. As a funds management business you will be big and profitable.
But the target for BT Funds Management's sales force was a financial planner in Doncaster (10 miles from Melbourne) with gold-rim spectacles (or the same in Parramatta or any other middle suburban Australian center). These guys are the modern bell-boys. Whey they are putting their clients into tech stocks there is nobody left to sell to.
And so it is - the most extreme example I have ever seen of the conflict between managing money and selling funds management products.
Imagine the patter
I wish I had a recording of a BT "sales call" from say April 2000. The market was off pretty hard - but all was OK in the financial planner in Doncaster. Economic growth looked great. The record for the NASDAQ measured in Australian dollars was astounding - not only because the NASDAQ was astounding but the AUD had collapsed to below 50c in the dollar.
The image projected would have been competence, technical sophistication and certainty.
About this time I ran into David Drury, then CEO of Principal at a CSFB insurance conference in New York. He found out I was Australian and regaled a circled crowd with his version of the BT mid-2000 spin. BT Funds Management was a very fine asset. Later I told two of the people in the circle that I thought the acquisition would cost him his career - but I did not have the courage to tell Mr Drury himself. In my memory I like to kid myself I did have that courage - but whilst I had that view I was racked with doubt about it. Mr Drury was an important man with an illustrious career, BT had a great reputation and I was just a junior analyst.
Mr Drury was a better salesman than I will ever be. He projected the illusion of certainty. [See here and here for a discussion about that illusion...]
Good spin versus good funds management
What makes for good funds management is -
(a) contentious, but well thought through opinions,
and in direct contrast,
(b) doubt sufficient to make sure the downside is always well covered
This is a schizoid requirement. People who have both these features are strange - flat out weird. People with only (a) are engaging but dangerous.
At Bronte we have both - but only because there are two of us. I am the contentious one. My business partner - his job is to extinguish any passions that I might have. [He is a real spoilsport - ed.]
How to manage financial product salesmen
A good financial product salesman knows things that a fund manager can't know. He knows for instance what is going through the mind of that financial planner with gold-rimmed spectacles in Doncaster. He knows what will sell.
At best he knows how to craft the message so that it will sell, so that it will not trigger any red-flags, so that it will make the recipient comfortable.
And that is good, you can say things in a glass half-empty way or glass half full way without bending the truth. Trivial example: risks are a bad thing, so focusing on the the risks does not sell your product whereas risk management is a good thing so focusing on that might help you sell. You can't actually do good risk management unless you focus on risks - but the angst that gives a good fund manager need not be seen by clients. A good salesman will hide that angst because - well - what sells is the illusion of certainty.
But a salesman who drives changes in the product because, so changed, the product will sell better is on the path that eventually destroyed both BT and Mr Drury's career. And good sales people are empathetic to the needs and desires of their targets so that is the path they tread...
But it is a dangerous path. Really dangerous.
I know (and respect) a fund manager with a very harsh solution to this. When the salesman tells him how to design his product he gives him a warning. The second time he fires him.
He has gone through a few sales people. And eventually he sold lots of product because the performance was too good to ignore.
But it is harsh, unpleasant and not very effective as a sales strategy.
Anyone got a better idea?
*Retrospectoscope is - to my knowledge - a Trade Mark of Platinum Asset Management - a very fine firm who took over BT's dominant Australian position.