The 'Oracle of Tampa' explains why he avoids private equity in favor of stocks and bonds - even though the strategy has raised some red flags

• A Florida pension has been managed for nearly 50 years by Harold Bowen and then his son, Jay. Unlike most managers, they've avoided private equity and other alternatives, preferring stocks and bonds.
• Jay Bowen said that unusual approach has helped the pension fund avoid the "prescription for mediocrity" that plagues other US funds, most of which don't have enough money to pay their beneficiaries.
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As investment firms hawk funds led by artificial intelligence, ever-more esoteric private equity deals, and complicated debt packages, Jay Bowen is sticking with stocks and bonds.

The investment manager doesn't believe in private equity. Or hedge funds. Or real estate, or infrastructure, or venture capital, or any investment besides the two staples of a 1950s-era portfolio.

For Bowen's main client, $2.1 billion Tampa Fire & Police Pension, plain-vanilla investing has more than sufficed. A mix of stocks and bonds has yielded an 11.7% return over the 45 years that Jay Bowen and his deceased father, Harold, managed the pension through their Atlanta-based firm, Bowen, Hanes & Company. Over the same time, the S&P 500 returned 12.2%. It's earned Bowens the nickname "The Oracle of Tampa," as the Wall Street Journal noted in a 2013 profile.

Tampa Fire & Police's performance puts the pension in the top 12% of similar funds in time frames ranging from the first quarter to 35 years, according to consultancy Wilshire Associates.

The younger Bowen, who joined the firm in 1986, has maintained his father's focus on fundamental stock picking, avoiding alternatives like private equity. The four-man firm now manages $2.6 billion for 223 clients, including individuals, pensions, and charities.

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Tampa Fire & Police has been the star of Bowen, Hanes & Co's portfolio, both by size and by returns. The next largest five clients after Tampa, four of which are government pensions, averaged a 7.7% return in the year ending March 31, and an 11.8% return over the last decade - both under the S&P 500's returns for those periods.

As other pensions load up on alternatives, seeking diversification and higher returns, Bowen, Hanes & Co. operates with a rare strategy that's raised some red flags in the investment community. Allan Emkin, a managing principal at advisory firm Meketa Investment Group, said it was highly unusual for an institution to only invest in stocks and bonds. He's also never seen an institutional investor similar in size to Tampa Fire & Police that works with just one investment manager.

"Seeking strategies that have the potential to reduce risk and volatility in those environments makes sense for any big institution who doesn't want to suffer catastrophic losses," said Allan Emkin, a managing principal at advisory firm Meketa Investment Group. "At that size and even significantly less than that, the portfolio could be better diversified."

But for Bowen and his clients, most of which have been with the firm for decades, just stocks and bonds are a high-returning, low-fee combination that he said others would do well to follow.

By investing in alternatives, investors are "trying to do good, but it's a prescription for mediocrity," Bowen told Business Insider in a recent interview.

'That's the way out of the mess'

The average municipal pension has about half its holdings in stocks, 23% in fixed income, 7% in real estate, 19% in alternatives, and 2% in cash, according to the most recent survey from the National Association of State Retirement Administrators. Meanwhile, Bowen said his firm has never used illiquid strategies because stocks and bonds have worked so well.

"All of these public funds, in my view, should be raising their common stock exposure. That's the way out of the mess," he said, noting that public pensions are underfunded by $4.4 trillion, according to Moody's.

Most pensions have invested in alternatives to help with that underfunding issue, seeking higher returns outside the public markets. But Bowen said that approach is flawed because of bad timing - he thinks institutional investors move too slowly and often enter asset classes just before a bubble bursts - and because of fee layers.

Bowen drew a comparison between Tampa Fire & Police and the city's retirement fund for employees, which is managed by a different board. In 1974, when Bowen's father started working with Fire & Police , the fund had $12 million, while the General Employees' Retirement Fund had $25 million. Fire & Police grew to $2.1 billion, whereas the employees' fund is $716 million. Both, Bowen said, have distributed about $1 billion to pensioners.

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Over the decades, the two pensions took opposite approaches.

"It reminds me of North and South Korea, almost," he said.

Bowen, Hanes & Co guided Fire & Police through cycles as its sole manager, whereas the General Employees' Retirement Fund has had "hundreds of managers and scores of consultants" over that time, Bowen said. That pension now invests with 13 managers in US small- and large-cap equities, international equities, fixed income, and real estate.

'The key is the long term'

Tampa Fire & Police is one of the few funds that gives near-total control over its investments to a single manager, with no oversight from internal investment staff or a consultant - an approach experts described as one of several red flags in a 2015 article in CIO magazine.

"I think it's very common [to use a consultant] and it is a reflection that the capital markets are complex and getting more complex," said Meketa's Emkin. "Getting an independent set of eyes and ears with a different set of experiences than the staff or the board might have is almost always accretive. It's a diversification of thinking and ideas. It's a check and a balance."

Bowen has heard this criticism for decades.

"They're roundly criticized for 'how can you put all your eggs in one basket, how can you have one manager?' but yet when you can show a 45-year track record with a cumulative total return of close to 12% ... you get to a point where the board is just firmly in the camp of embracing what's known as the 'Tampa model' now because it's worked," he said. "It's not going to work every year, there are periods where they're going to suffer, but the key is the long term."

Phillip Braun, a finance professor at Northwestern University's Kellogg School of Management, agreed that cutting out a consultant can save on fees, but said that requires a "sufficient support staff." Otherwise, "that's probably a mistake," he said.

"There are so many different investments you can make today that without sufficient support to make those decisions, you're most likely going to make a wrong decision."

Pensions also typically look for firms with multiple generations of talent so that older executives can pass the baton to investment professionals with knowledge of clients' portfolios, Braun said.

Bowen said his long-term portfolio positioning would protect clients if anything happened to him or his three team members immediately. Succession planning, however, is another issue for the team, all in their 50s and 60s.

"Bringing people in is something we'll have to think about," he said.

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