Largest Index Fund in the United States Is Managed by a 36-Year-Old
Kathleen Condon wrote a college thesis arguing that you can’t beat the stock market over the long run. Now she manages $13 billion invested by people who suspect she might have been right.
Condon, recently chosen by Bankers Trust to oversee its mammoth index-fund operation, does not suggest there’s any connection between her present job and her college theories.
“I would not cite it as being a seminal work in the field,” she said laughing.
Index funds attempt to mirror the stock market rather than outperform it, and are geared to keep pace with a given market index. “The most popular is the Standard & Poor’s 500,” Condon said.
Bankers Trust runs the largest index fund--$13 billion from pension funds and other institutional investors. The operation includes 38 individual accounts, ranging from about $25 million to $3.6 billion, and a co-mingled account for investments by “smaller” customers.
At 36, Condon is living out her college dreams of a career in the stock market. In the late 1960s, when students generally found big business a topic only slightly less distasteful than big wars, Condon was at Mount Holyoke studying economics and preparing for Wall Street.
“I was absolutely sure I wanted to be a portfolio manager,” she said. “I was the only economics major in my class that didn’t go on to graduate school.”
She inherited her interest in the market from her father, who worked for the Boy Scouts, but nurtured a secret passion for stocks. “I sort of absorbed it from him. The market was his hobby and still is,” she said.
She wrote an undergraduate thesis examining “whether one could in fact select stocks that would outstrip the market,” and concluded over the long run, the answer was no.
Her work was only theoretical, however. After graduation, Condon went to work at Bankers Trust, learning how to become one of those people who spend their lives trying to beat the market averages.
“The theory is that since markets are efficient, investors all have equal access to information and no one can hope to outperform the market over the long run. Therefore to hire an active manager is futile,” she said. “But I don’t think that’s necessarily true. There are certain areas one can exploit.”
Earliest Attempts
Bankers Trust’s index fund, started in 1977, is one of the earliest attempts to go with the flow rather than trying to beat the market.
“Historically, we’ve been just ahead of the Standard & Poor’s 500,” Condon said.
Mirroring the index is more difficult than it seems. Some funds simply buy stock in all 500 companies in the same proportions that they are represented in the index. But their managers must continually rearrange their portfolios to reinvest dividends, account for mergers, and keep pace with any changes Standard & Poor’s itself makes in the list.
“That’s not the route we’ve taken,” said Condon. “We use a sampling technique. We buy a selection designed so we will in fact capture the character of the market. We think that lowers the cost of the operation.”
The stocks that do get included, Condon said, include the largest companies in the S&P; 500, and some other companies in each industry sector, chosen by a sampling formula.
“For the largest companies, we hold the same percentage as the S&P; 500,” Condon said. “Beyond that, we replicate sector diversification. We make sure we haven’t introduced any biases. It’s not as easy as it sounds. It really isn’t.”
Index funds have been getting more attention recently as complaints mount about the cost of hiring traditional money managers.
Business Week, for instance, recently noted that only 26% of the equity portfolios beat the S&P; 500 last year. “Frustrated plan sponsors are taking their money from active managers and placing it in relatively low-cost ‘passive’ investments such as index funds,” the magazine said.
Condon helped put together the Bankers Trust index funds in the late ‘70s, and then left them for other projects. When she returned a few months ago, she said, she was surprised at the extent of interest in the funds.
Index funds are cheaper than most other methods of equity investment--partly because they do not require analysts to study the pros and cons of individual stocks. Another big difference is transaction costs--the fees charged to buy and sell stocks. “Unless you have cash flow into the fund, you’re talking about a turnover of 8% percent a year,” said Condon. “I’ve seen some active funds turn over 30% to 40% a month. Somebody told me the average is about 75% a year.”
Condon has some strong opinions on money managers, since one of her hats at Bankers Trust is division head for consulting. Bankers Trust is master trustee for many accounts that have money invested elsewhere, and part of Condon’s job is to help those clients analyze the performance of their outside managers.
Like virtually every other observer of the money management scene, Condon believes there is too much concern for short-term performance. But convincing a money manager you’re really interested in hanging on for the long term is difficult, she admitted.
Investors, she said, should lay things on the line with their money managers, make it clear how long they have to show good performance and how their work will be evaluated. “Set some objective--’we’re going to measure you over 3, 4, or 5 years.’ Tell them: ‘These are our expectations. We realize you’re going to take risks, and may have subnormal periods.’ ”
Started Out at a Bad Time
Condon’s concern that money managers be given some time to prove themselves may have its roots in her own early career.
“I started running an active portfolio for the first time in April of 1973, just when the markets collapsed,” she said. “It was an interesting and humbling experience.”
She has spent her entire career at Bankers Trust.
Condon got a master’s degree in business administration from New York University, attending school at night and finishing in the same two-year span full-time graduate students take. “Compared to college, I didn’t find it particularly burdensome,” she said.
