An earlier version of this article included the incorrect year of death of one of WCM’s key partners. The error has been fixed. The story also clarifies details related to the company’s late-1990s buyout when it had $200 million in assets under management.
In just one decade, a Southern California investment advisory firm went from the brink of ruin to overseeing $100.5 billion in assets as of September, up from $833 million in 2011.
The firm, WCM Investment Management, was nearly finished after a string of wrong-way bets on large-capitalization domestic growth stocks from 2005 to 2011. Its inexperienced managers favored Yahoo Inc. over Google LLC
; eBay Inc.
over Amazon.com Inc.
; and Nokia Corp.
and Dell Technologies Inc.
over Apple Inc.
Clients fled sending assets under management down to less than $900 million from about $4 billion in roughly five years.
Then, something happened that workplace experts say is uncommon for the world of money management. The firm’s top brass stuck by employees instead of firing them, and principal owners took the entire hit from lost income. At the center of the firm’s approach was the notion that corporate culture is the single most powerful determinant of long-term returns, and that a “toxic” workplace of finger-pointing, passing the blame, and dissent would only seal the firm’s fate.
“We don’t know many companies that would do what WCM did, by not immediately laying off its workforce on any kind of problem,” said Sue Bingham, lead author of the 2018 book “Creating the High Performance Work Place: It’s Not Complicated to Develop a Culture of Commitment.”
Through a rare mix of tragedy, second chances and a bit of luck, WCM’s management said the firm lived to fight another day by trusting young, portfolio managers to grow into their roles, shunning mass layoffs, and turning most employees into co-owners of the firm. The firm had already spent years cultivating a culture in which employees could thrive, and was choosing to stand by that approach during tough times. While WCM’s methods of operation remain unusual according to workplace experts, the firm’s methods may offer a way for employers to hold on to talent and reap rewards following the widespread “Great Resignation” by workers that has occurred during the pandemic.
“We were on our knees, but there was absolutely no point in blaming people for mistakes,” said Paul Black, the firm’s co-chief executive and one of four principal owners who bought out WCM’s founder, Darrell Winrich, in the late 1990s when the firm had $200 million in assets under management. “All we did was say, ‘How do we get better?’ and `We’re going to fix our way out of this.’ From there, you create a vibrant culture in which people can thrive.”
The payoff was huge. The WCM Focused International Growth fund, now the firm’s biggest fund, with roughly $26.8 billion in assets, has outperformed its benchmark index for much of the past decade. It posted a one-year return of 29.5% during the pandemic, and a year-to-date return of almost 11% after eking out a 0.2% gain in the third quarter, based on preliminary results released last week. That compares with returns of 24.4% over the past year and 6.3% year-to-date from the benchmark iShares MSCI ACWI ex-U.S. exchange-traded fund
which fell almost 3% in the third quarter.
WCM, initials derived from Winrich Capital Management, says it now holds shares valued at $2 billion to $3 billion in each of the following non-U.S. companies, whose shares have soared in the past few years: Mercado Libre Inc.
Latin America’s answer to Amazon; Canada’s Shopify Inc.
; and Keyence,
a Japanese maker of sensors and bar code readers.
Unlike bigger, more widely known Southern California firms such as bond giant Pacific Investment Management Co. and Jeffrey Gundlach’s DoubleLine Capital LP, WCM has often flown under the radar, staying off social media and largely out of the news. Its headquarters is nestled a few blocks from the coastline of Laguna Beach, in a nondescript building walking distance to Wahoo’s Fish Taco restaurant, a Rip Curl surf shop and a Jack in the Box. With the exception of a pair of Barron’s stories last year, WCM’s owners said they have rarely spoken publicly to the media, until now.
Word about its success started to spread more broadly in July, when Black wrote a four-page paper called “Why Do Money Managers Fail? It’s Not Why You May Think.” In it, he wrote that money management firms close their doors for one primary reason — “a toxic culture” — and that WCM has survived despite all its mistakes “because caring for each other means we almost didn’t know how to fail.”
“We’ve stayed intentionally below the radar,” Black said in an interview. “We wanted to create a little mystique and not give away parts of our competitive advantage. But we have such a lead on the things we do differently, that we can talk about our philosophy and our process. At the end of the day, it comes down to hiring remarkable people — and we have so many, that it would be very, very hard to duplicate.”
The “toxic” culture he refers to isn’t confined to the cutthroat world of finance. The pandemic-triggered “Great Resignation” of 2021 had workers of every stripe, from technology to healthcare, fast food and trucking, expressing frustration with their jobs. So-called quit rates have hovered near record-breaking levels for months, with the most recent data showing that nearly 4 million Americans left their jobs in July.
To be sure, many financial firms have moved away from the hard-core, rough-and-tumble image of the 1980s. Their focus now, especially during the COVID era, is on “wellness and accountability, and they’re clearly much more open-minded,” said Ross Baker, global leader of the financial-services and insurance-industry segment at Chicago-based Mercer, the world’s largest human-resources consulting firm. “There’s no doubt they have made great strides.”
Nonetheless, many firms typically have changed fund managers who weren’t performing well relative to peers over time, instead of standing by them as WCM did, according to Baker and Bingham, the author, both of whom learned about WCM through an inquiry from MarketWatch.
A firm that values its people has a tangible electricity that is felt from the moment one walks through its doors or talks to its employees, Bingham said in a phone interview. And that energy can radiate directly to the bottom line, where turnover is typically less than 4% and absenteeism is under 1.5%, even with unlimited paid sick days deemed reasonable and necessary. By contrast, the cost of continually replacing workers is high: One carpet manufacturer with 6,000 employees and a 57% turnover rate puts the price tag at $4.2 million over 18 months, she says.
Companies can’t afford to keep people who aren’t performing well, but successful businesses try to deal with difficulties first and fix them, according to Bingham.
‘Dynamic living organism’
WCM’s top executives say their firm’s success can mostly be boiled down to the decision to invest in companies with a culture similar to its own — one that is flat, decentralized and places a high value on attracting and keeping employees — on top of a willingness to learn from companies’ mistakes. Of WCM’s 75 employees, 40 of them are owners, who received shares of the firm after three years of employment. Four of those owners are main partners, responsible for making final decisions, says Black, including himself. (Natixis Investment Managers, part of France’s Natixis financial group, owns a minority stake in the firm.)
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Most of WCM’s people, he says, have chosen to work at the office instead of from home since May 2020, bucking the prevailing trend among American workers given a choice during the coronavirus pandemic. Though there is no vaccine or mask requirement to be at the office, about 90% of employees got vaccinated and many wore masks, according to Black. On a firmwide trip to a ranch outside of Bozeman, Mont., this past May, WCM’s employees can be seen standing almost shoulder to shoulder. Fewer than five people have tested positive for the coronavirus, according to the firm.
Founded in 1976 under original owner, Darrell Winrich, WCM came into being in its current form through the 1998 buyout that involved Black. At the time, Black says he and the firm’s three then-principal owners opted to make compensation transparent, give some decision-making power to employees, and “build a very dynamic living organism that has a great ability to succeed.”
“We almost became too democratic, and allowed people who didn’t understand portfolio management to have influence,” said Black, 63. “So, we learned there was a limit to the number of people who could do things. At the same time, we had no idea what we were doing. We were reading every book on investing we could find, and looking for commonalities to apply to portfolios.”
Talent they could afford
Early on, Black says WCM hired young, inexperienced portfolio managers because the firm didn’t have any choice: It didn’t have the brand or the money to go after more experienced talent. As time went on, it became clear that managers were simply doing the same thing as many other investors, by going after seemingly high-quality stocks that were falling in value.
Back in 2005 to 2007, for instance, Yahoo, eBay and Dell all had what seemed to be bigger advantages than Google, Amazon and Apple, Black says. But what WCM says it hadn’t expected was that Apple’s mobile operating system would become so massively disruptive, changing the way nearly everyone interacts with their phones. The firm also didn’t foresee Amazon building a third-party marketplace with a solid end-to-end experience for consumers, or Google’s founders remaining so heavily engaged in their business, in contrast to Yahoo’s revolving door-at-the-top.
What WCM’s managers were focusing too much on was a particular company’s competitive advantages, known as “moats,” Black says. They paid too little attention to what mattered even more: the direction the “moats” were headed in. After all, simply owning a company because of a seemingly wide advantage was foolish since businesses were always strengthening or weakening against their peers.
As clients fled, the firm caught a few breaks when it landed a $15 million account from a hospital in the Central Valley of California, plus $100 million from a Boston wealth management firm, between 2006 and 2007, just enough to keep the firm alive, according to Black. The firm had already been left reeling from the loss of one of its key managers, Neil Cumming, who died of brain cancer in 2005.
During the firm’s darkest days from roughly 2007 to 2010, its domestic growth fund, which then represented the bulk of the business, “went through a horrific period of performance,” says Mike Trigg, a former Morningstar Inc. equity analyst who joined WCM at 29 in 2006 and became a first-time portfolio manager a year later. “It was extremely lean times. Compensation was flat for many years and we were focused on trying to keep the business going. But I never once considered leaving because of the people. I really believed we had learned from the mistakes we made and had become a much stronger firm.”
“In many respects, we’re still thinking about how this can go wrong and what we need to do to get better,” Trigg says. “We’ve maintained the same mindset we had at that period.”
Along with Black, Trigg, now 43, is one of five portfolio managers behind the roughly $27 billion WCM Focused International Growth fund. According to Morningstar, the fund’s 1.05% expense ratio on its institutional share class
lands in the middle quintile for its category, while its 1.30% expense ratio on retail shares
is in the second-costliest quintile. Expenses are an important component for investors to evaluate because they come directly out of returns.
The fund will be closing to new investors as of Nov. 30, a “welcome” decision following the strong inflows that were triggered by its success, says Morningstar analyst David Carey. Existing investors can continue to add or withdraw from the fund.
Three of the portfolio’s five managers, Trigg; Peter Hunkel, 49; and Sanjay Ayer, 40, come from unconventional backgrounds.
Ayer is a Columbia University business school dropout who briefly toyed with the idea of opening a hamburger stand out of college. He joined WCM in 2007 at the age of 26, after following Trigg from Morningstar.
Hunkel graduated from San Jose State University in 1995 and from nonprofit Monterey College of Law in Seaside, Calif., nine years later. He once sold strawberry containers for a packaging company. While Hunkel says he had some experience managing portfolios with a WCM-affiliated firm, it wasn’t a whole lot.
Long before WCM’s fortunes soured, its asset managers were constantly rethinking their investment process, relying on so-called “pre-mortems” to plot out what might go wrong with the companies they invested in. So in 2004, Hunkel stepped forward with a proposition for what would eventually develop into the Focused International Growth strategy. He said that instead of trying to invest the fund in non-U.S. large- and midcap companies already in the relevant benchmark index, WCM should ignore the benchmark and construct its portfolio any way the firm sees fit.
That enabled WCM to bulk up on shares of non-U.S. consumer-staples, technology, and healthcare companies long before they became popular, Hunkel says. The fund’s biggest holdings as of the end of the second quarter were LVMH Moet Hennessey Louis Vuitton SE
and Taiwan Semiconductor Manufacturing Company Ltd.
‘A second chance’
Meanwhile, Ayer says he was making a litany of bad stock picks when he first joined the firm, which produced poor outcomes, like Arcos Dorados Holdings Inc.
the McDonald’s Corp.
of Latin America; and Sun Art Retail Group Ltd.
China’s version of Walmart Inc.
He says his mistake was “blindly applying lessons from developed markets onto emerging markets,” and ignoring how many countries were evolving differently. China, for instance, was developing an e-commerce sector that was “leapfrogging” over bricks-and-mortar stores.
As international stocks gained greater footing in the financial market over the next handful of years, the team’s stock picks — including Taiwan Semiconductor to Chinese technology company Baidu Inc.
or Walmart’s Mexican and Central American division — started bearing fruit.
WCM said that all of the stocks mentioned aren’t an exhaustive list of the firm’s holdings or recommendations, and there is no guarantee that its picks will be profitable.
“Everyone makes mistakes in this industry, but there is a fixed mind-set that you are either born with a magical investing gene, or branded as a poor stock picker and not given a second chance,” Ayer says. “But I see it as something you should get better at over time. I made my fair share of mistakes and it took me a while to find my calling.”
“We built this pretty good platform where we can get the best out of people, allow them to think differently, and not get trapped by a profession that, as a whole, is about trying to show you’re smart, and not admitting mistakes or showing vulnerability.”