Dennis Lynch Jr. (Marshall) Joins Bloomberg Radio’s Podcast - Masters in Business with Barry Ritholtz
March 31, 2022 (Investorideas.com Newswire) No one could have predicted the challenges that would come with the pandemic market. However, there were fund managers who succeeded despite the volatile environment, and Dennis Lynch Jr. (Marshall) was one of them.
As the Head of Morgan Stanley Counterpoint Global, Dennis Lynch is willing to be different. "You have to be willing to stick out your neck in order to succeed from time to time," he says.
In the Masters in Business podcast with host Barry Ritholz, Dennis Lynch shared his unique approach to picking effective investments-despite the tricky pandemic market. Learn how Lynch managed to become one of the most successful stock managers in Wall Street history, thanks to his contrarian approach to investing.
About Dennis Lynch Jr. (Marshall)
Dennis Lynch, who was born Marshall Lynch, grew up in Rumson, NJ in Monmouth County. Although he's a Jersey man at heart, Lynch received his education in New York. He earned his bachelor's from Hamilton College and subsequently earned his MBA in Finance from Columbia University Business School.
Dennis Lynch Jr. (Marshall) started his finance career as a sell-side analyst but quickly rose through the ranks to become the Head of Morgan Stanley Counterpoint Global. With $130 billion in assets across 19 different products, Lynch co-manages five Counterpoint Global funds with teams across the globe.
He has over 20 years of experience with Morgan Stanley and an outstanding track record. The Wall Street Journal tapped Dennis Lynch as the number-one stock-fund manager of 2020. Dennis Lynch was also a Morningstar Fund Manager of the Year and has a AA rating with Citywire.
Dennis Lynch Jr. (Marshall)'s Investment Selection Process
In an industry dominated by short-term thinking, Dennis Lynch takes a contrarian approach that looks at the long-term potential of a business instead.
It's a strategy that rarely pays off with flashy quarterly statements, but with steady long-term growth. While Lynch says there's a lot of research and nuance in his approach to investing, he follows these four strategies to come out on top.
1. Building a diverse team
Lynch credits his stellar track record with the unique setup within Morgan Stanley Counterpoint Global. This arm of the business has smaller, more diverse teams that can make more agile decisions.
"The people on our team aren't what we call investors," Lynch says, "They show up each day looking for the best ideas in their area of expertise, but they're not trying to find the best large-cap growth healthcare companies."
Most investment firms choose a category and build a team around that category, but Lynch does the opposite: he chooses a great team and allows them to explore different categories. "It's a huge competitive advantage from a structural standpoint," Lynch says. In this way, Lynch can pick up on opportunities that more compartmentalized teams miss out on.
But how can you build a team for success? "What we do is attract unique people. And then, based on their personalities and passion, we enable them to do what they do well."
That's why he does personality assessments for his team every few years. "It promotes self-awareness," Lynch explains, "It's nice to remember that you're hardwired to act a certain way under duress. Self-awareness helps you make more high-quality decisions."
2. Company-first stock picking
Dennis Lynch's team works very differently than other mutual funds. They go after a small group of companies across the globe. If they find a promising opportunity, they then figure out which of their five funds would be a good fit for that investment-a clear departure from other mutual funds' modus operandi.
"We're very picky about what we invest in," Lynch adds, "Certain characteristics jump out at us." In Lynch's world, those characteristics often include:
- Opportunity: You can't invest without an opportunity. There does need to be high growth potential and a big addressable market to make a business fit for investment.
- Inside ownership: The founders need to have a large equity stake in the business so they have skin in the game. That's why Lynch has personal money in all of Counterpoint Global's products-he says you have no business managing a product if you don't invest in it personally.
- Culture: Are people taking ownership in this business? Are they hands-on? Do they care? In Lynch's experience, a culture of ownership is a must to succeed with long-term investments.
Lynch's bottom-up, company-specific investments are largely driven by the data instead of the news cycle. While interest rates certainly matter, he acknowledges that investors don't have a lot of control.
"If you tell me the market's overvalued in aggregate, it doesn't help me make a decision about one company I'm looking at," Lynch explains. "If you think interest rates are going up and you build a portfolio around that thought, and you're wrong, you've got to change your whole portfolio," he adds.
Instead of focusing too much on macroeconomics, Lynch's team makes individual judgments about companies one by one. Since factors like the Fed are largely unknowable, Lynch's investment approach focuses on what's in his control.
3. Betting on winners of the pandemic market
With investments in Shopify, Zoom, Twilio, and other pandemic-friendly brands, Lynch saw an unbelievable surge in his investments in mobile-first companies.
The thing is, Lynch had holdings in these companies long before 2020. "2020 was an exceptional time, obviously. We were relatively fortunate in a tough time for everybody," Lynch says.
Ten years ago, Lynch invested in big companies like Apple, Google, Facebook, and Amazon. But around 2018, he shifted his perspective. He saw more opportunities in young companies that could experience significant growth.
"There were some really interesting young companies in some of the areas that have benefited more recently, not just from COVID, but from sector growth," Lynch says. For example, Lynch invested in SaaS and eCommerce three years before COVID because he saw promise in the technology's time and cost efficiencies.
While the significant growth is promising, Lynch explains that the pandemic pulled these investments forward. That means future returns likely won't be as dramatic because we're seeing so much of the returns upfront.
Even so, investors need to look at future trends when choosing investments. Instead of focusing on what's popular in the here and now, Lynch's team was successful because of their long-term, future-focused approach that paid off years down the road.
4. Gathering both quantitative and qualitative data
Lynch believes that you need all kinds of data before you can decide on a particular company. If you look too much at one financial variable, for example, you might think too much about the economic circumstances in that reality-which can lead to tunnel vision and missed opportunities.
"Real life is more complex," Lynch says, "You need to look at a lot of different vantage points to understand the situation." While many fund managers have rules of thumb that make their jobs easier, Lynch says these rules are too strict and they aren't always correct.
Although Lynch looks at quantitative metrics, he's concerned about a business's qualitative metrics, too. "A good investment culture is constantly thinking about alternatives, and not being closed-minded, but being open," he explains.
Dennis Lynch Jr. (Marshall) and the future of investing
While Dennis Lynch's returns are promising, he warns that the market is challenging for even the most seasoned investors. "We're not expecting the high returns we've seen over the last 20 years at Counterpoint Global," Lynch says, "We're not likely to see the return profiles we've been able to achieve historically."
Even so, markets change over time. While categories, rules of thumb, and quantitative metrics can make fund managers successful for a period of time, these approaches aren't useful in a world that's changing quickly. "The real goal is to be the alternative to the S&P 500," Lynch explains. But fund managers will need a more flexible approach going forward to be a viable alternative to the S&P 500, with enough plasticity to evolve in a world that changes seemingly overnight.
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