Acquired
00:46:02 · Ben Gilbert, David Rosenthal
[00:46:02] S0: Go wrong? [00:46:03] S1: Yeah. Well, as you can predict, after a couple more go go years, the bubble bursts. In the nineteen seventies, the oil crisis hit, stagflation hits, the stock market declines 50%. It is not quite great depression levels, but you and I, Ben, have also never lived through anything like the nineteen seventies in The US. It was bad. It was a lost decade. [00:46:29] S0: Even 2008 was not this severe. Certainly, the short lived COVID crash was not this severe. Software going out of favor in 2022 was not this severe. The .com bubble burst was not this severe. This is something that very few listeners will sort of understand the magnitude of and and feel intrinsically how bad this was. [00:46:47] S1: Yeah. I mean, interest rates went to 21% by the end of this. I mean, the world basically fell apart a couple years ago when interest rates went to, what, like, five? You know, can you imagine? [00:47:00] S0: So what was the good years of the go go time, and then when did it fall apart? [00:47:04] S1: Through the sixties and then probably, like, 1970, 1971, it starts falling apart. And then once the oil crisis start hitting in '72, '73, '74, GoGo just completely falls apart. So the IVAS fund, they ported over the IVAS fund itself into Wellington. It had continued to perform during the Gogo years. It gets a drawdown of 65% in one year, and they ultimately shutter the fund. Like, they close it down. [00:47:33] S0: They closed down the IVAS fund entirely. Down [00:47:34] S1: the IVAS fund. Oh, wow. Yeah.
00:47:34 · David Rosenthal, Ben Gilbert
[00:47:34] S1: the IVAS fund. Oh, wow. Yeah. [00:47:36] S0: Yeah. But hadn't they already shifted the Wellington fund's style to look a lot more like IVAS. [00:47:43] S1: So I [00:47:43] S0: guess Wellington was suffering too. Right? The the fund? [00:47:46] S1: Wellington was suffering too. I mean, really, like, Wellington is just a battered ship taking on water on all sides at this point because it had been out of favor during the go go years because it was too conservative and too balanced. [00:47:59] S0: It was underperforming the market. [00:48:01] S1: Underperforming the market. Then it transformed basically into a go go fund. [00:48:07] S0: Took on a lot more risk. [00:48:08] S1: A lot more risk, then that falls off a cliff. By 1973, the assets of the Wellington Fund have fallen all the way from $2,000,000,000 at the time of the merger down to $480,000,000. So over three quarters of the assets in the fund, and thus, three quarters of the revenue to the management company, poof, up in smoke. [00:48:30] S0: Now all of that wasn't because of the assets decreasing in value. [00:48:35] S1: A lot [00:48:35] S0: of that was redemptions where investors are taking their money and going elsewhere. But doesn't matter to the management company. For for them, AUM is AUM.
00:48:35 · Ben Gilbert, David Rosenthal
[00:48:35] S0: of that was redemptions where investors are taking their money and going elsewhere. But doesn't matter to the management company. For for them, AUM is AUM. [00:48:41] S1: And this is somebody made this point to me in research. Management companies of investment firms have phenomenal operating leverage, as we talked about earlier. As you are growing your funds under management, you don't have to scale your headcount or your operations or your costs in the same way, and so you can get this, you know, amazing operating leverage and profits. [00:49:02] S0: Much like a software business. [00:49:04] S1: Much like a software business. Unfortunately, that works in both directions. So Right. If your assets under management ever start to shrink, that goes away very quickly. [00:49:15] S0: You still have almost all the exact same operational responsibility that you did when you had lots of assets when you have a smaller number of assets.
00:49:15 · Ben Gilbert, David Rosenthal
[00:49:15] S0: You still have almost all the exact same operational responsibility that you did when you had lots of assets when you have a smaller number of assets. [00:49:22] S1: Yep. And thanks to the merger, there are now four new partners around the table with mouths to feed who own 40% of the management company. So then in the midst of all this, to complicate things even further, Jack starts to develop a crisis of conscience. As all these losses are piling up at Wellington and clients are withdrawing and they're shutting down the IVEST fund, he starts wondering, you know, first to himself and then allowed to his partners, Guys, what are we doing here? Like, we're still taking fees from our fund clients. Yes. Our assets under management are shrinking, so our fee stream is shrinking. But for the clients who are sticking with us, we're not lowering our costs. We're still getting paid pretty well, and we're just incinerating their capital. Something feels wrong [00:50:21] S0: here. I've heard this referred to as his Jerry Maguire moment in the book, the Bogle Effect, where, you know, that famous scene in in Jerry Maguire where he loses confidence in the entire industry of being a sports agent and writes a letter and says, guys, we're gonna do this right. Yep. We should change everything and and blow up our whole business. And as usual, you know how that is received.
00:50:21 · Ben Gilbert, David Rosenthal
[00:50:21] S0: here. I've heard this referred to as his Jerry Maguire moment in the book, the Bogle Effect, where, you know, that famous scene in in Jerry Maguire where he loses confidence in the entire industry of being a sports agent and writes a letter and says, guys, we're gonna do this right. Yep. We should change everything and and blow up our whole business. And as usual, you know how that is received. [00:50:43] S1: Well, so Jack's Jerry Maguire moment here is he gives a speech to the whole firm where he throws out this idea that, hey. Maybe we should actually mutualize the firm's funds, dissolve the management company or have the fund itself acquire the management company, and eliminate all of the excess profits that we are making and just solely serve our fund holders, operate at cost, and at least reduce or get as close to eliminate as possible the fees that they are paying for this, frankly, not very good service that we are providing them. [00:51:21] S0: A mutually owned group of mutual funds or, mutual mutual as Jack loved to say. [00:51:27] S1: Mhmm. Yes. Indeed. Now buy it out. Why would they have to do that if Jack and potentially his partners out of the goodness of their hearts were were gonna give it to the fund holders. Well, before mister Morgan retired, he had taken the management company public, like floated it on the stock exchange. So there were public shareholders there in the management company in Wellington management company along with Jack and along with the four IVAS partners.
00:51:27 · David Rosenthal, Ben Gilbert
[00:51:27] S1: Mhmm. Yes. Indeed. Now buy it out. Why would they have to do that if Jack and potentially his partners out of the goodness of their hearts were were gonna give it to the fund holders. Well, before mister Morgan retired, he had taken the management company public, like floated it on the stock exchange. So there were public shareholders there in the management company in Wellington management company along with Jack and along with the four IVAS partners. [00:51:55] S0: So you not only have to get, you know, your camp, the Philadelphia camp to agree, but you need the Boston guys to get on board too that are a big voting block at 40% and all these public shareholders. And why would anyone do this? Because it's not rational or economic. It's charity. Let's take this business that generates a bunch of cash and has enterprise value. Let's stop generating the cash, and let's take its enterprise value and effectively call it zero now and give it to the funds itself.