JULY 2015 | A PUBLICATION OF INSTITUTIONAL REAL ESTATE, INC.

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Gregg Fisher insists on interrogating Factsthe numbers until they speak the truth

Top Performers Summertime Blues Port of Call The first of our new Top Ranks Seasonal slowdown means RIAs Investors’ ship comes in as feature lists the 100 hottest can get refocused on their it is full speed ahead for real estate mutual funds business processes the maritime industry By Mike Consol FactJust thes

2 REALASSETS ADVISER | JULY 2015 ne gets the notion after a chat investment advisers; in effect, managing Gregg Fisher with money manager Gregg money for their adviser-clients’ clients.) insists on Fisher that when he reports to his Meanwhile, Barron’s has named Fisher one New York City office each morn- of America’s Top 100 Financial Advisors, Oing, he hangs his Emotional Self right next interrogating elevating him from 33rd on the 2014 list the numbers to his suit coat. And he does not re-clothe to 22nd on the 2015 list. himself in emotion until his fiduciary Those research findings have also led until they responsibility to clients has been completed Fisher to defy conventional wisdom at times, for the day. launching for example three new investment speak the truth. The founder, CEO and CIO of fast-grow- funds in the smoking aftermath of the global ing Gerstein Fisher knows that investors are financial crisis — a Multifactor Growth driven by emotion, and emotion routinely the Equity Fund, an International Growth runs afoul of what the scientific process has Equity Fund and a Global REIT Fund. This to teach us about sound investment deci- at a time, mind you, when the euro zone was sions. He takes that posture so seriously he Just tottering and most observers thought REITs spearheaded the creation of the Gerstein were going to do poorly because of predicted Fisher Research Center, a collaboration between the firm and a “select group of lead- interest rate hikes. ing academics” in the areas of finance, risk It is all summed up in the firm’s motto: engineering and asset pricing. The research Invest with reason. center investigates the pertinent issues faced Though one man’s reason is another man’s by individual investors and produces papers folly, Fisher insists that better outcomes are on the topics. realized by interrogating the numbers and It appears to be working. During the letting them tell their truth, rather than get- past five years, Gerstein Fisher has tripled ting caught up in momentary circumstances Facts its assets under management and advise- and becoming reactive. ment to $3 billion. (Gerstein Fisher’s clien- “We always realized that at the end of tele includes both individual investors and every transaction is a human being,” he says.

REALASSETS ADVISER | JULY 2015 3 BEGINNINGS stock market was going to do reasonably Thaler liked the idea and introduced When he started the firm in 1993, one of well during the next five years. One person Fisher to an academic colleague named Fisher’s initial objectives was to create an raised his hand, and that was Fisher’s uncle. Phil Maymin, an NYU finance instructor environment where he could learn. Specifi- That reignited Fisher’s interest in behavioral who did his Ph.D. work with Thaler. Fisher cally, he wanted objective industry informa- finance, a field that seeks to combine behav- and Maymin spent the next couple of years tion of the kind academics produce, rather ioral and cognitive psychological theory with doing research and published a few papers. than data produced by his industry peers. conventional economics and finance to pro- That work was the foundation of the Ger- He suggests that industry sources tend to vide explanations for why people make irra- stein Fisher Research Center. aggregate information in pursuit of financial tional financial decisions. “We created the research center as a way to do research designed to help the end inves- tor,” Fisher says. “A lot of that research was focusing on behavioral finance ideas.” One of the research center’s projects took on the convention of dollar-cost averaging. Fisher says the question investors often ask after inheriting a lump sum of money is: Should I just dump the million bucks in the market today, or should I move in gradually over time? Conventional wisdom says grad-  Businesses ually, which is the principle of dollar-cost averaging. Research scenarios conducted by define them- the Gerstein Fisher Research Center indi- cated otherwise. The project looked back to selves by what the early 1900s and compared the results of they do not do investing money in one lump versus gradu- ally moving it into the market over a 12- to as much as by 18-month timeframe. The data concluded that about 75 percent of the time the inves- what they do. tor would be better off investing the money immediately in one lump sum. Why? That is because markets go up more often rewards, while academics produce data and Also on the bill that day as a conference than they go down, according to Fisher. He research in pursuit of getting published in speaker was Richard Thaler, a University acknowledged that 25 percent of the time an respected journals. In the former case, there of Chicago professor regarded as one of investor would have performed better using is too big a temptation to tailor informa- the pioneers of behavioral finance, hav- dollar-cost averaging and moving gradu- tion to validate a firm’s existing investment ing written some papers on the topic in ally into the market. The problem is, when model and worldview; in the latter case, the the late 1970s. The time was opportune you look at that scenario’s returns 15 years research is hard to taint because it is subject for Fisher to tell Thaler about a research or 20 year later, the difference in returns is to rigorous peer review. project he had in mind. For about 15 not meaningful, and the odds of your timing The study of data and quantitative method- years Fisher and his colleagues had been being correct are one in four. ologies has been a lifelong interest for Fisher. tracking investor interactions in the form “So you have a low differential benefit, The inspiration for the research center dates of notes, emails, phone calls and live con- with a low probability of getting it right,” he back to 2008 during an annual conference versations. The firm had close to 2 million says. “It is a big question and it gets asked all staged by Gerstein Fisher and to which 500 records of investor interactions that Fisher the time.” of the firm’s investors were invited. This was wanted to mine to better understand how Fisher wanted the question definitively right after the global financial crash when people’s past experiences — and memo- answered empirically, rationally, and in a way most investors had lost somewhere close to ries of those experiences — influenced that gave investors context. half of their assets in the stock market, and their future investment choices. In his many had also lost their jobs and half the estimation, future expected returns must MULTIFACTOR INVESTING market value of their homes. During his talk be getting influenced by what happened Fisher also talks energetically about his that day, Fisher asked audience members to in years past, to investors driven more by firm’s “model-based, multifactor investment raise a hand if they were confident the U.S. emotion than fact and reason. approach” for building client portfolios,

4 REALASSETS ADVISER | JULY 2015 which has its root in the arbitrage pricing theory pioneered by MIT finance professor Steven Ross in 1976. The theory argues that returns that outperform the market can only be achieved by assuming extra risk. A port- folio’s expected return, according to Ross, can be determined by its exposure to various risk factors. Using proprietary multifactor models, Fisher says the firm builds globally diversi- fied portfolios with strategic “tilts” (his term for overweights and underweights), relative to the index-to-risk factors involved, such as whether the stock is large or small cap, the price premium being paid for value versus growth shares, and the premium being paid for shares that are rising in price. By not taking outsized positions on indi- vidual securities, sectors or countries (as is common with many traditional equity man- agement strategies), Gerstein Fisher believes it is reducing the risk of significant under- performance compared with traditional benchmarks. Consistent with his “invest with reason” mission statement, Fisher says the multifactor approach enhances the firm’s ability to make investment decisions borne out by research and data rather than emotion or gut feelings. Gerstein Fisher’s marketing material on this subject notes: “By filtering information mathematically instead of qualitatively, we know exactly why we own what we own, and can articulate this rationale to our clients … A multi-factor framework provides reason, clarity and discipline to our process.” Consider that there are about 400 investment-model factors that have been researched in academia and are taken into account by the firm, though Fisher says once you get past the first five or six critical fac- tors, the incremental value of adding others becomes marginal — though these factors differ by asset class. Within the model-based multifactor approach to investing, Fisher says decisions about client portfolios are “rules based” because it takes a bit of the subjectivity algorithm that operates on clear parameters “This whole robo-adviser thing is a lot and emotion out of the process. More spe- using hard, numerical — rather than soft, of marketing,” he says. “The idea of using cifically, a rules-based approach might say emotional — information. One might call technology to drive your investment pro- purchase this set of securities if the follow- that a robo-adviser, one of the industry’s hot cess is not new to Gerstein Fisher. We have ing five things transpire. Those rules can be buzz phrases, but that reference will not pass been doing this for years. It just has to do automated and carried out with the use of an Fisher’s lips. with having portfolio strategies efficiently

5 REALASSETS ADVISER | JULY 2015 Gerstein Fisher, in part, was its 20-plus taxes. So when I formed Gerstein Fisher as year longevity and that it survived two 50 an investment business, taxes were always an percent market corrections. important part of the way we think.” “A lot of investment managers don’t sur- vive,” Fisher says. “They die after five or REAL ASSETS six years. They move on. To be a firm with The firm’s real assets strategy revolves around over 20 years of experience in our industry its global REIT fund and the commodities is quite rare actually. There aren’t many.” market. Regarding the latter, Fisher says he has been preaching to clients for many years TAX OR CONSEQUENCES about the value of having some of their assets Gerstein Fisher also places a great deal of in things under the ground, such as food and emphasis on taxes. water. Regarding the former, Fisher observes “Taxes matter,” Fisher flatly states, “and a that investing in international real estate 10 lot of investors ignore taxes.” years ago was almost impossible, but the Then he explains the consequences of overlooking tax implications by pointing REIT market has evolved and broadened out that, on average, investors give up into international venues including Australia, 2 percentage points per year to income Canada, the euro zone, Mexico and now even  On average, in- taxes on their investment strategies. While some emerging Asian countries. acknowledging this scenario is oversimpli- “What REITs have done is created an vestors give up fied, Fisher says that if a person invests for opportunity for people to purchase real estate 30 years and is losing 2 percent of their in different countries in a fairly liquid, low- 2 percentage gains each year because of bad tax strat- cost manner,” he says. egy, that comes to 60 percent in foregone points per year returns without compounding, and around PAST IS PROLOGUE 80 percent to 90 percent in foregone gains While many chief executives at many money to income taxes with compounding. In other words, if your management firms talk aspirationally about long-term expected return is 7 percent and the future, Fisher says, “We plan to continue on their invest- you are giving up 2 percent in excess taxes, to do what we do, manage money for people.” you net 5 percent. He cites Harvard Business School professor Let’s consider this one other way. If you ment strategies. and Gerstein Fisher advisory board member invest $1 million in a lump sum and get a 7 Frances Frei — whose research examines how At $1 million percent average annual rate of return for 30 organizations and individuals can reliably years compounded annually, you will retire deliver excellence — as an influence who compounded with $7.6 million. If you get an annual com- taught him the lesson that people and busi- pounded rate for 30 years of 5 percent aver- over 30 years, age, because 2 percent per year is lost to bad nesses define themselves by what they do not tax strategy, you will retire with $4.3 million. do as much as what they do. In a word, focus. that is roughly Yes, that is $3.3 million in lost returns because “We have been very careful to not go out someone was not paying attention to the and start doing lots of different things. We $3.3 million in investment plan’s tax exposure. want to grow the organization, but we basi- lost returns. “There are 79 lines on the first two pages cally want to manage money and do a really of a federal 1040,” Fisher says, “and if you are good job at that.” a good investment manager or adviser you Fisher has decided to stick with what has would be looking at every one of these and been working. That means he will be check- they all inform in some way your investment ing his emotions at the office door for the strategy.” foreseeable future. organized through the use of robust tech- For Gerstein Fisher, taxes are very much nology. That is not a new idea.” part of the organization’s DNA. Fisher’s fam- Mike Consol ([email protected]) is The firm has also benefited from the -tal ily is in the accounting business and has been editor of Real Assets Adviser. ent it was able to attract after the financial for more than 40 years, during which Fisher crash, people the firm did not have access Copyright © 2014 by Institutional Real Estate, Inc. Material did a stint as a CPA. Somewhat comically, may not be reproduced in whole or in part without the to prior to the cataclysm. The allure of Fisher says: “As a kid I grew up thinking about express written permission of the publisher.

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