Two weeks ago, when we remarked with great satisfaction that Wall Street's original pentagram of bull [7] had now been cut to three, with the departure of BlackRock's hypermabull Bob Doll, we had one lingering question: why would a strategist, and not a trader, leave Wall Street in the "prime" of his CNBC prime-time years? After all, it is not like Doll ever was right, or was judged by the quality of his predictions - if that was the case he would have been fired years ago. Basically, there was a big question mark surrounding this departure. Today, we may have gotten our answer: as Reuters reports [8], it appears Doll may have been dipping into the wrong model. Financial model that is.
From Reuters:
"In January, BlackRock Inc made a significant, but easy-to-miss change in the fund literature for three of its mutual funds... This year's fund literature said the investing model used "quantitative factor models generated by third-party research firms." Typically such a change indicates a shift in a fund's methodology. But there was no shift in the investment process.... the new description came after the funds' board of directors learned that the investment models used for Doll's funds were never proprietary and had been based on other firm's models, according to two people familiar with the situation. Doll was not the one who alerted the company about the issue, they said. The two people did not want to be identified because they were told about the situation in confidence"... 'The change was made just months before 57-year-old Doll, a regular on CNBC who is best known for his annual predictions and perennial bullish outlook, announced his retirement. Doll's last day is June 30."
While we respect Reuters attempt at political correctness, we are somewhat more blunt when we ask: was Bob Doll "told to quit" after it became clear, from other sources, that he was incapable of even constructing the simplest financial model on his own and had to "borrow" others'? In other words: not only did Doll never have an original idea, he couldn't even come up with his unoriginal ideas on his own.
To everyone who has ever worked on the Street, a model, whether an M&A model, financing model, or some other generic form of pro forma excel analysis is the very first thing one learns as a financial analyst. An example of one can be seen below:
[9]
The inability to create one demonstrates nothing less than a total inability to tie in the income statement, balance sheet and cash flow statement. In other words - failing both Accounting and Finance 101.
Which just happens to describe precisely the "skillset" of your typical broken record permabull. Such as Bob Doll and all the other CNBC regulars.
More from Reuters:
In response to questions from Reuters, Doll said in an e-mailed statement that he had used a mix of several third-party models for many years.
"In some cases, I had the models customized for us to reflect my view of key input factors," Doll said. "I then applied a relative weighting to these models. We used these outputs as one part of my investment process, which also included a fundamental analysis."
For the past one, three, five and 10 years, the three funds have underperformed their benchmarks, according to Lipper.
Shocker.
Daniel Celeghin, a partner at Casey Quirk & Associates, a Darien, Connecticut-based consultant, said there is often a bias among money managers against buying third-party models.
"Most buyers would (ask) 'If this model is really good, why aren't they keeping it for themselves?'" he said.
Even so, most quantitative equity fund managers who buy third-party models tailor them to meet the needs of their portfolios. That can lead to ambiguity about what is - and is not - proprietary, fund experts said.
"(Managers) can use the inputs, or models, as a small part of that process or a meaningful part," said Vadim Zlotnikov, chief market strategist at Bernstein Research, who said he was not aware of the BlackRock situation.
A fund board signs off on each fund's registration statement - which includes details on its investment strategies and methodologies - attesting to its accuracy. It is the fund manager's responsibility to keep the board informed of details of the strategies and investment process.
From an investor's perspective, "the fact that the funds were using third-party models is not that big a deal," said Jeff Tjornehoj, head of research at Lipper. "But from a (fund) board perspective I could see why it would be important to disclose who owns what when it comes to the research."
Even worse, what it really indicates a laziness bordering on incompetence, and ultimately a complete collapse of faith in the manager, which, if justified can lead to the departure of the individual in question. Just like Doll.
What is great however, is that with each and every incident of this kind, main street is exposed to the real "talent" behind Wall Street's glamorous and grossly overpaid facade: a hollow core, where incompetence is masked by big and meaningless words such as "key input factors" and "relative weighting", where failure is rewarded with seven figure bonuses, and where the exposure of the real ugliness beneath it all is either promptly swept under the rug, with the quiet disappearance of the "weakest link" or in the worst case with Hank Paulson going to Congress with a three page termsheet and demanding a blank check for years of piling error upon error, or else guaranteeing the end of the world.
And that is really all Wall Street is.