Inside Bessemer

October 5, 2007

Marc D. Stern
Chief Investment Officer

Marc joined Bessemer Trust in 2004 as chief investment officer, after a decade with Bernstein Global Wealth Management. He began his career in corporate strategy and development with McKinsey & Co. and PepsiCo.

HSG: Marc, what do you consider your mandate?

MDS: It's straightforward. We seek to provide superior long-term investment results for high-net-worth families and individuals, net of inflation, taxes and fees.

HSG: Do you find such a concentrated focus on private wealth to be limiting?

MDS: No. Our focus on private wealth gives us a clarity of mission. We understand who our clients are and what they expect from us. This allows us to direct all of our resources and best thinking toward the shared goals of our clients.

HSG: What makes the investment effort at Bessemer unique? We do today what we were established to do in 1907: manage the assets of high-net-worth families and the entities in which they play an active role, such as foundations, endowments and private partnerships. Every portfolio, service and solution at Bessemer is created specifically and solely for this group of investors. This contrasts with many asset management firms that were formed to manage pension funds and institutional assets, and eventually packaged their capabilities into separate accounts and mutual funds for the HNW and retail markets. It's a great way to expand to a bigger audience, but it can dilute your focus. At Bessemer, we don't introduce distractions into our investment model by attempting to serve multiple client segments.

HSG: Aren't ultra-affluent clients basically institutional investors?

MDS: There are certain similarities but there are some important differences too. Our clients' objectives may address future assets and liabilities, just like a pension plan or insurance company, but each family's distinct composition and goals create a layer of complexity that institutions typically don't have. High-net-worth families want institutional quality management and we seek to provide that, but in a highly customized way that considers their particular needs. In addition, each investment strategy has to make sense on an after-tax basis. Those dynamics are quite different from what you might find at firms that primarily serve pension plans and other institutional investors.

HSG: How big is the investment team?

MDS: We have a team of about 80 investment professionals between New York and London. That includes everybody from myself to portfolio managers, analysts, quantitative specialists, traders and risk-control personnel. It also includes our portfolio support professionals, who make sure our implementation reflects each client's investment goals and preferences.

HSG: What is the relationship between research and portfolio management?

MDS: We believe we can deliver the best results by having a dedicated research team for each asset class. For example, an analyst who is part of our mid-cap team works alongside a portfolio manager, research director and other analysts who are all focused on mid-cap equities. This structure gives each analyst a stronger link to a specific portfolio, clarifies priorities and reinforces the importance of teamwork. It also allows us to develop clearly aligned compensation structures that benefit the entire team and provide additional incentives for out performance.

HSG: What do you look for in an investment professional?

MDS: In addition to strong technical skills and a record of career success, we look for people who can be advocates for their research conclusions. They have to be willing to take a stand and be persuasive. Similarly, we want professionals with the willingness and ability to function as part of a team-people who will share information and communicate openly, respectfully challenge one another's ideas and work collaboratively on a solution. We see these as core elements of teamwork.

HSG: What investment disciplines do you make available to your clients?

MDS: We offer our clients a wide-ranging global asset allocation that includes large-, mid- and small-cap equities in the U.S. and around the globe, commodities, taxable fixed income, tax-free municipals, hedge funds, private equity and real-estate. Each is designed to fit well within the overall asset mix.

HSG: Is everything managed internally?

MDS: We believe strongly in combining in-house and third-party capabilities. This structure enables us to provide a high level of expertise across all asset classes. Our active involvement in the investment markets on a daily basis also serves another function. It helps us acquire a clear understanding of actual market conditions, which provides critical input into our asset allocation decisions. Without this ongoing involvement in the markets, a manager would need to rely on quantitative models to establish and fine-tune asset allocations. While quantitative models are helpful in establishing an asset mix, at Bessemer we do not allow them to be the final arbiter of reality. Experience has repeatedly confirmed that market judgment must play a role.

HSG: Is there an investment strategy you use as the core of your clients' portfolios?

MDS: We call our flagship asset allocation Balanced Growth. Its objective is to achieve long-term growth for our clients via a diversified portfolio that minimizes risk. While our focus is on long-term results, we care about the way it is achieved. Our goal is always to participate in stronger markets overseen by a group of our most senior investment professionals. It's how we deliver our best thinking to our clients.

HSG: How is this implemented at the client level?

MDS: We meet separately with account managers to discuss individual clients. Our team is always prepared to modify clients' investment portfolios to reflect the risk profile and specific needs of a family. For instance, we may be asked to allow for income needs or the specifics of a particular charitable structure.

HSG: Allowing for client differences, how similar are the large-cap portfolios owned by Client A and Client B?

MDS: They will be nearly identical. Our portfolio management is centralized for a reason. We've developed superior processes, and if they are not delivered consistently to all of our clients, we're undermining our own efforts. Consistency is the only way we can control the process, take accountability for the results and meet our client's expectations. However, customization is still a primary concern. If a family has a significant position in a particular stock or strong personal preferences, we will modify their sector exposure.

HSG: Alternative investments, especially hedge funds, have become a household word the past five to seven years. Has that mainstreaming impacted your allocation to alternatives?

MDS: Not dramatically. Alternative investments like hedge funds, venture capital, buyouts, and real estate have been part of Bessemer's asset allocation for a long time. A lot of our clients grew their wealth by creating and monetizing a private enterprise, so they're comfortable with the risks and the merits of less liquid assets. Because alternative investments have been important to us for decades, our manager research teams have strong relationships that enable us to get preferred access to top-performing, capacity-constrained managers.

HSG: How would you describe the risk-management process?

MDS: As you might expect, risk management is of great interest to clients, particularly in light of the 2000-2003 bear market and the recent market turmoil. We employ an ongoing, multistage risk management process that includes all the technical and quantitative elements you'd expect, including historical quantitative models, risk analytics and scenario modeling. But we also rely on common sense and the judgment of professionals that is based on decades of market experience. The goal is to understand the amount of risk we are taking on behalf of clients, both on an absolute basis and relative to benchmarks. We use those insights to help us determine how to best position portfolios in light of current market conditions and other variables. By determining where risks and opportunities are unusually provocative, we can proactively adjust our asset allocation recommendations.

HSG: How often do you communicate with clients about the investment process?

MDS: Clients hear from our investment group every quarter on our market views, investment strategies and performance. During unusual times, such as this past summer, we communicated with our clients on a more frequent basis. In addition, our group meets regularly with the account management team and virtually all of our firm's personnel to discuss our latest thinking.

HSG: Our research has shown that the higher an individual's net worth, the more likely they are to prioritize tax mitigation over investment performance. Do you see that among your client base?

MDS: Tax management is certainly an important issue for nearly all clients. They want to know we are taking thoughtful, practical steps to minimize their taxes. In our experience, though, the number-one investment priority for most clients, regardless of the extent of their wealth, is making money over the long haul.

HSG: Does Bessemer's private ownership give you any particular advantages as an investor?

MDS: Yes. It adds flexibility in how we reinvest in our business, which allows us to be responsive to our clients' needs without compromising our long-term plans. Because we're not part of a giant retail bank, mutual fund complex or other corporate entity, there's none of the usual competition and conflicts among business units. Everyone here is focused on the same goal. That creates the right mindset for teamwork and entrepreneurship, two qualities that we believe are essential to deliver the innovative investment services our clients expect.

Our mission is clear and that makes it easy to connect the dots between our clients' expectations, the way we measure success and how we reward our employees.