The Rookies MUTUAL FUND COMPANIES ARE PAYING EXORBITANT WAGES TO HUNGRY YOUNG STOCK PICKERS. ARE THESE KIDS WORTH THE MONEY?
(MONEY Magazine) – The bidding war for Trevor Gurwich erupted last spring. Still only 28, he resembled any other M.B.A. student at Columbia University--playing soccer, partying, cramming in the library. But investment titans were already fighting to hire him as a professional stock picker. Henrik Strabo, a high-flying fund manager, launched the bidding, offering Gurwich the chance to pick stocks for his Twentieth Century International Discovery Fund. With bonuses, Gurwich--a former management consultant who had made about $60,000 buying stocks for his own account--would easily rake in $100,000 in his first year. In the past, most M.B.A.s would have groveled for such a salary. But Gurwich wasn't about to sell himself short--not even to join a hot fund with a five-star rating from Morningstar. He informed Strabo that he'd need two weeks to consider the offer and speak with rival firms.
Within days, three other suitors had bid up Gurwich's price. Legendary fund manager Mario Gabelli tried to recruit him as an industry analyst; Prudential wanted him as a sell-side analyst; Art Samberg, a renowned hedge fund manager, tantalized him with an offer of vast bonuses if his stock picks soared. Gurwich knew that, financially, Samberg's hedge fund would be tough to beat: "I heard there's a kid there with a couple of million dollars in the bank and he's only about 28."
The courtship intensified. When Gabelli heard about the bid from Strabo, he immediately boosted his own offer. Then Strabo's company, American Century Investment Management, struck back, pumping up its bid to beat Gabelli's. The president of American even called to sweet-talk Gurwich about his future with the firm, and Strabo reassured him about the company's generous stock-options program.
Was Gurwich shocked to be the object of a four-way bidding war at this stage of his career? "I wasn't astonished," he says nonchalantly in the living room of his new Park Avenue rental. "It was pretty much in line with my expectations."
Fund companies are falling over themselves these days to hire kids like Gurwich--talented, wildly ambitious stock pickers in their twenties, fresh out of business schools like Harvard, Wharton and Columbia. They start as analysts, recommending stocks to more experienced fund managers. But a small elite has already broken through to the manager level. Yolanda McGettigan joined Fidelity as an analyst in 1997, just one month after graduating from business school at Duke University. Now 28, she's running Fidelity's Select Construction & Housing fund, and investors pay a 3% load for her services. "I definitely felt ready," she chimes happily. "You just have to be confident."
In 1996 the median salary for a newly minted Columbia M.B.A. joining a fund company was $87,000, including bonuses. Last year that shot up to $120,000. Tom Fernandez, director of career placement for Columbia's business school, says some recent graduates "even negotiated to get a small percentage of the fund company's profits.... They can ask for the moon and get it."
And then, after two or three years on the job, the fund business starts to get seriously lucrative. One New York City-based fund manager (who asked not to be named) left Yale with an M.B.A. in mid-1995 and took a $60,000 analyst position at a small fund company. Last year, he started managing his own mutual fund and took home $420,000--a sevenfold jump in less than three years.
As for Trevor Gurwich, he ended up accepting Henrik Strabo's offer, picking stocks for the Twentieth Century International Discovery Fund. Ultimately, Strabo pitched him a deal worth more than $130,000, including bonuses. The hedge fund probably would have made him richer, but Gurwich reasoned that Strabo would groom him as a global investor. His first assignment would be to scour Israel, South Africa, Italy and France for small companies. "There's time to make money later on," says Gurwich. "I'm willing to make the short-term sacrifice of not making millions."
It's tempting to ask whether the mutual fund companies have lost their minds. Why are they so desperate to secure the talents of these kids? Can they possibly be worth this much money? And what does it take to make it in this ruthlessly competitive business?
WANT TO PLAY IN OUR JET?
Not so long ago, ambitious M.B.A.s wouldn't deign to work for mutual funds. The industry was small, unlucrative, deeply unglamorous. But in the past decade, everything has changed. As small investors poured billions into funds, salaries for analysts and portfolio managers surged. Suddenly, top-performing stock jockeys began appearing on the covers of magazines--and fund companies began bidding for their services as if they were free-agent athletes.
American Century, the outfit that hired Gurwich, perfectly embodies what's happened to the industry. In 1958, when it was founded, the firm boasted two funds, four employees and $100,000 in assets under management. Last July, its assets hit $75 billion. American Century now hawks 70 funds, run by an investment staff of nearly 200.
Other fund companies have ballooned too, and they're all fishing for stock pickers in the same shallow waters. "Finding the talent is difficult," concedes Robert Puff, American Century's chief investment officer. "We're all having trouble relative to our needs." Last year, his company made offers to several second-year M.B.A. students, only to discover that rival firms had snagged them months earlier. "It really woke us up," says Puff.
His solution? This year, the company set up its first formal internship program. Students who hadn't yet started their second year at business school spent the summer analyzing stocks at the company's headquarters in Kansas City, Mo.
Of course, nowadays it isn't enough just to give a student a challenging, well-paid summer job. Anxious to show its interns a swell time, American Century flew them to New York on a corporate jet, wined and dined them in Manhattan, and set up a private tour of Goldman Sachs' trading floor. Still, they didn't make as much as the interns at Fidelity, who pocketed $7,000 a month.
"MY PARENTS WERE DISAPPOINTED"
Each morning, Robert Gardiner drives to his office in Salt Lake City in a Chevy Suburban the size of a small bus. The air conditioning doesn't work, and the car rattles madly, but Gardiner isn't fussed. A few months ago, he says, someone "spilled a gallon of Kool-Aid in there. I got the hose out to clean it, and I said, 'This is the car for me.'" Gardiner, who married at 22, lives in a modest ranch house with a trampoline in the yard for his three kids. In his spare time, he teaches Sunday school and serves as an assistant scoutmaster. "The only thing that's interesting about me," he says, "is how boring I am."
Yet at 33, this quiet, sweet-natured Utah native is a rising star in the fund world and a prime example of what new recruits like Trevor Gurwich hope to become. As manager of the Wasatch Micro-Cap Fund, he's produced dazzling results. In the three years following the fund's inception in June 1995, he outpaced 98% of all small-cap funds. Hit by the recent crash of small-cap stocks, the fund is down 1% this year. But in the 12 months that ended March 1998, it returned 70%.
Gardiner has been richly rewarded for that performance. Last year, he earned $345,000. Sam Stewart, his boss, has also given him a 10% stake in the management company that runs the Wasatch funds. If Wasatch were bought out, Gardiner's equity would probably be worth $4 million. Nonetheless, by industry standards he's underpaid. Lawrence Lieberman, a fund industry headhunter, declares: "Any manager worth his salt is demanding cash compensation of a million, on average, and equity to the tune of many multiples of that."
Stewart, who founded Wasatch in 1975, regards the salaries being paid to young fund managers as "truly amazing." But he adds, "If there's any business where you might be worth that money, it's this. If you're really talented, it's leverageable." Gardiner, for example, will make many millions for himself and his shareholders if he joins that tiny elite that beat the market over the long haul. "The problem," says Stewart, "is that a lot of people are really also-rans. At least two-thirds of the people who make that sort of money don't deserve it. They've just taken advantage of a market that's only gone in the right direction."
In his quest to find and nurture true market beaters, Stewart has looked beyond the standard pool of recruits, though he himself has an M.B.A. from Stanford and teaches investing at the University of Utah. He searches instead for what he views as a rare cocktail of scientific and artistic skills. The science part, which is easy to spot, includes the brain power to crunch numbers. But the stock picker's artistry, says Stewart, is a more intangible "extra component," an inspired right-brain gift for seeing connections and grasping the big picture that others miss.
Stewart takes this theory so seriously that he even hired a Stanford-trained industrial engineer because he was impressed by the kid's father, a urologist: "I remember talking with his dad and thinking, 'He has an interesting thought pattern, and his son went to Stanford. Maybe it got passed onto him....' Lo and behold, it did get passed on." The son, J.B. Taylor, is now a highly promising analyst for Gardiner's microcap fund.
Nor is Gardiner the standard business school product. One of 10 children, he worked at Wasatch as a bookkeeper when he was 16, spent two years in France as a Mormon missionary, then studied at the University of Utah, where he finished first in his class in physics and second in math. He worked his way through college as a part-time analyst at Wasatch, figuring he'd get a Ph.D. in physics and would then teach. He soon missed picking stocks, though, and returned to Wasatch full time at 25. "My parents were really disappointed," he says. "They thought I'd be a professor."
Stewart started Gardiner on a base salary of $15,000. Another young analyst, Karey Barker, got $10,000 because she didn't have a family to support. To develop their skills without risking shareholders' money, Stewart made each of them manage a paper portfolio of stocks. For them to receive a full bonus of $30,000, their portfolios had to beat Nasdaq by 20 percentage points. In her first year, Barker's portfolio returned about 75%, and Stewart presented her with a rookie-of-the-year trophy.
Stewart taught Barker and Gardiner to build elaborate earnings models and sent them to visit companies. But the key to grooming stock pickers, says Stewart, is to force them early on to make clearcut decisions on stocks, not allowing them merely to present a company's pros and cons. "It's very hard to get people to say, 'This company is a winner, this is a loser,'" Stewart explains. "You have to really push them to make conclusions." Then, in its own Darwinian way, the market weeds out the unfit. "You make a judgment on a company," he says, "and you're either right or not. It's not something you can fudge."
Barker and Gardiner excelled, but a string of others failed. A gifted Harvard graduate dropped out of the fund business altogether after a retail stock that he'd picked fell apart. "He thought he'd done everything right," says Gardiner. "But the company almost went bankrupt." He ended up instead as a marketing manager at a food products company. "You have to say, 'Okay. I struck out that time....What can we learn from it?'" says Gardiner. "But he didn't want to deal with the uncertainty of the market."
The stock picker's life is so fraught with risk that emotional strength matters as much as intellect. "It's the most undermining industry," says Barker, who has run the Wasatch Mid-Cap Fund since 1994. "You're getting your feet chopped out from under you the whole time." She should know. In 1995, when she was 27, her fund returned 59% and was the best-performing no-load fund in the country. All of a sudden, she was being profiled by magazines like Fortune and Smart Money. But since then, the fund has underperformed dismally. "You're wrong a lot in this business," she sighs. "It's very upsetting."
SINK OR SWIM
Every few weeks, Marc Baylin receives calls from headhunters trying to lure him away from T. Rowe Price, a Baltimore-based investment firm with $140 billion under management. Baylin, a 30-year-old who has worked there as an analyst for five years, seldom bothers to call back. But on one occasion, he was told he could double what he was earning. Baylin stayed put: "I'm extremely happy where I am," he says. And he's now earning more at T. Rowe than he'd have made at the other company.
"I've seen some obscene offers," says Mike Sola, another young analyst at T. Rowe Price. "It's not unusual to see offers between $300,000 and $500,000 for someone with three to five years' experience."
With too little talent to go around, fund companies have been poaching from one another like never before. "Putnam had a headhunter who talked to six people here in a month," says Jim Kennedy, T. Rowe's director of research. The offers have been flying around at every level of the business: Kennedy says one firm tried to tempt him with a deal worth nearly $30 million over three years. He wasn't interested. "Maybe it's my Nebraska hokiness," he says, "but I enjoy the people I work with." In any case, he hasn't suffered financially by staying at T. Rowe: His company stock--excluding his mountain of options--is worth more than $25 million.
In this money-soaked environment, it isn't enough just to hire and train talented stock pickers. Fund companies also have to fight to keep them loyal. Few have succeeded like T. Rowe, which has 27 analysts and 18 fund managers in its domestic equity division. Kennedy says he has hired 49 people in 11 years and has lost only seven of them.
One reason is an exceptionally rigorous recruitment process. "You start with 1,200 or 1,300 resumes a year to hire four or five analysts," says Kennedy. In Baylin's year, only two made it. To ensure that they'll fit into the company's team-oriented culture, the best candidates are interviewed by 20 to 30 people. Baylin--who has an M.B.A. from Northwestern and describes himself as "very competitive" and "very analytical"--was interviewed for three days.
T. Rowe Price almost never poaches from other companies. "If you buy someone from another shop, they're a mercenary," says Kennedy. "Their only loyalty is to money. Someone else will come along and buy them a couple of years later." Still, T. Rowe isn't above doling out money to prevent its own people from jumping ship. In the past couple of years, the firm has heaped stock options even on its young analysts. For a high flier like Baylin, that makes it financially reckless to leave, especially since T. Rowe's stock price has nearly tripled since 1996. On paper, his options are already worth a few hundred thousand dollars. "If the stock does well," says Baylin, "it gets into seven digits very fast."
But the chance to make millions is only part of what these rising stars crave. Often, the overriding issue is the opportunity to manage their own fund. Seema Hingorani, who graduated from Wharton in 1996 and has worked as an analyst at T. Rowe for two years, doesn't hide her ambition. "Is running money in my horizon in the next two years?" she asks. "If it's not, I'll go elsewhere." That's no idle threat. When T. Rowe first hired her as an intern, she also had offers from Putnam and Fidelity. If she were to join another fund company now, she says, "I could probably make $350,000 or $400,000." She's 29.
To keep its analysts happy, T. Rowe plies them with responsibility. Baylin started as a computer services analyst, covering only a dozen companies. His task was simply to pick the best stocks in his "space" and persuade fund managers to buy them. By recommending winners like First Financial Management, he quickly gained credibility. He now follows nearly 200 stocks and works closely with three fund managers who run a total of $12 billion. At times, they've had up to a quarter of their assets in stocks he recommended. Baylin has also been authorized to buy and sell stocks for the $4.3 billion New Horizons fund. Kennedy refers to him admiringly as "a portfolio manager in the making."
Responsibility comes even faster at Fidelity, which hired eight M.B.A.s as analysts last year. One of them, Matt Grech, became manager of Fidelity Select Electronics Portfolio, a $2 billion sector fund, in June. He was 27. "My reaction was, like, holy shit!" says Grech, who's now 28. But he's used to being a capitalist prodigy. At 12, he gambled $3,000 on Apple Computer stock. "It was all the money I had in the world," he says. He cashed out eight years later, having tripled his money. By 14, he was obsessed with business magazines and already planned to pick stocks for a living.
While Grech was studying for his M.B.A. at the University of Chicago, Fidelity made a presentation on campus. "I knew right away at my core that this was where I wanted to work," he says. "There's very little hand-holding. You're basically given a desk, a phone and a list of stocks.... That's the beauty of Fidelity. It's either sink or swim."
If they're gifted enough, analysts can find themselves managing sector funds as early as nine months after joining the firm. "Part of Fidelity's culture is that we bring in very bright young M.B.A.s," says Bruce Herring, Fidelity's director of research. "We feel that people one year out of school have an intensity and a hunger level that often makes up for their lack of experience."
Grech started out analyzing semiconductor equipment stocks just as the sector skyrocketed. In his first year, he racked up the best returns of any analyst at Fidelity. Last April, he received his next assignment: semiconductor stocks. He suddenly had to become the resident expert on Intel. "Scary is the right word," he says. "Imagine yourself going to an entirely new universe, which is what these stocks were for me." As if that weren't enough, he then took the reins of the electronics fund too. So what's he finding hardest? "Sleeping," he says. "There's always something to worry about."
The pace isn't likely to let up. Fidelity will try to broaden his experience by giving him two different sector funds to run over the next few years. If all goes well, he'll go on to manage one of the biggest diversified funds in the land.
That is, of course, if he hasn't been seduced into running a rival mutual fund or hedge fund. In 1996 and 1997, Fidelity lost more than a dozen equity fund managers, including Marc Kaufman, who had run the fund that Grech now helms. "The best of the people who left went to hedge funds," says Herring. "It had developed into a real business that was paying very aggressive compensation."
To halt the exodus, Fidelity boosted the bonuses it pays top performers. Equally important, the firm now consciously cossets its prodigies, regularly reassuring them that their careers are headed in the right direction. This year, the talent drain has stopped. But hedge funds are still hungrily eyeing the company's young stars. "Most of us, especially in the technology area, get those opportunities," says Andy Kaplan, 33-year-old manager of the Fidelity Select Technology Portfolio. So why not leave? "It wasn't going to maximize my happiness," he says, "to take the first multimillion-dollar offer that came along."
WHERE THE HELL IS REALITY?
It's a sweltering day in August, and Wasatch Micro-Cap's Robert Gardiner is trying desperately to figure out what's going wrong. This morning, a clothing retailer named K&G Men's Center issued a bland press release: Sales for the quarter were up, but a few stores in Texas and L.A. were lagging. Nothing to worry about, thought Gardiner, whose fund owns a major stake in k&g. He was wrong. In the few hours since the release, the stock has lost nearly a third of its value.
Gardiner stares at his computer screen, rapidly scanning the company's numbers. He's thinking of buying more, but what if he's misunderstood the situation? "Maybe they're communicating something I don't understand," he frets. "The inventories look kind of high." He needs to talk to the management at once, but the company has failed to return repeated calls. Jeff Cardon, another fund manager at Wasatch, has left an angry message for the company: "This is your biggest institutional investor. Call me back immediately."
When the call finally comes, analysts and fund managers crowd around Cardon's desk to listen over the speaker phone. Cardon fires off questions about inventories and sales, explaining, "I'm trying to figure out where the hell reality is." Gardiner asks if K&G will close its money-losing store in L.A. The company's CFO sounds shaken and depressed. "Whatever we do," he replies darkly, "we're not going to sit there and bleed forever."
At the end of the conversation, Gardiner remains convinced that K&G will keep growing at 25% a year and that today's panic is a buying opportunity. "This isn't lost money to my shareholders," he insists. "They'll get it back." It's a reassuring thought, but the stock keeps falling. Within days, it plunges below $7 a share--a loss of nearly 80% in a matter of weeks. Compounding Gardiner's troubles, the rest of the market is tumbling too. In a single day, Nasdaq falls 4.6%. It's a tempestuous summer for small-caps, and Gardiner is getting smashed in the maelstrom: In two months, his fund drops more than 20%.
Emotionally, it can be hard to bear. Some of the money he's lost belongs to him, his parents, his uncle, and his sisters and brothers. And yet Gardiner's belief in his stock-picking skills remains unshaken. "I know without any doubt that I can beat the market with my fund," he says. "I wouldn't be doing this if I weren't convinced."
He may be right. But the past few weeks have been an ominous reminder of what a brutal profession this can be. If Gardiner and his like can endure the stress and enrich their shareholders, they probably deserve every dollar they earn. Still, Gardiner himself remains unsure. "I feel kind of guilty about what we're making," he says. "There is so much excess out there."