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A fair comparison?
This image is from a Cliffwater piece, “Long-Term Private Equity Performance: 2000 to 2022.” It is representative of many other comparisons of public and private equity performance.
In a report — “Private vs. Public Investment Strategies: Reported and Real-World Performance,” authored by Xiang Xu — PGIM begs to differ:
In practice, a CIO must follow an investment strategy to achieve a portfolio allocation to private assets. Such a strategy involves investing in only a subset of funds currently available (not the universe of funds), following a particular commitment pacing strategy, and temporarily holding uncalled and uncommitted capital in another asset class (say, a public market index or cash). Fund-selection uncertainty, commitment pacing, and the uncalled and uncommitted components are important contributors to a private investment strategy’s real-world performance. Consequently, a CIO’s private asset investment strategy is unlikely to experience the reported asset class performance.
The firm asserts that the common reporting approach of comparing “pooled IRRs for private assets and index returns for public assets” is misleading. Instead, it proposes a “fair comparison” framework, with which it uses to derive what it considers to be real-world performance.
This is one of those issues where people seem to immediately take sides, usually depending on whether their work is primarily focused on public or private investment vehicles. Nevertheless, shouldn’t this issue be at the top of the list of open questions for chief investment officers and governing bodies, given its importance in asset allocation and the need for the accurate reporting of results?
Is ChatGPT biased?
Speaking of immediately taking sides . . .
In the introduction to his paper, “Is ESG a Bad Idea? The ChatGPT Response,” Robert McGee flatly states, “With ESG, investment decisions are made for political reasons rather than economic reasons.” Starting with that presumption (which is debatable at the very least), it’s no surprise that McGee claimed that ChatGPT has a left-wing bias when it comes to questions about ESG.
The paper is a quick read and surfaces questions about the tool’s “ethical beliefs” — red and blue versions of it are sure to become a thing — and the inaccurate statements that it can produce. The author’s own beliefs shine through it all (and his short bio is interesting in and of itself).
Whither “research”?
Two articles in the Financial Times reflect on the state of sell-side investment research. One is titled “Why equity research fails over and over (and isn’t coming back).” Rupak Ghose writes:
Two decades on from the Eliot Spitzer settlement that shook up the investment research business, there are four reasons why it is still shrivelling in size and credibility: declining information advantage, new competitors, margin pressure in secondary cash equities and a shrinking client base.
In the other, Dan Davies surveys the landscape by placing paywalled content (“anyone who wants your content has to pay for it, up front”) and “begging” (hoping people will pay voluntarily for what you produce) on two ends of the spectrum of research that is available.
In between are the influencers (who get paid by advertisers) and those who “develop a slightly weird parasocial relationship with [their] readers, such that they will look after you through other channels, hire you for jobs, pay you consulting fees and so on.”
There are oodles of “research” providers out there, and many of those writing Seeking Alpha posts and Substack newsletters have significant industry experience. Davies’ article is more broadly concerned with the evolution of research bundling and firm practices in Europe, but it’s clear that non-traditional research channels are changing the context.
Also, in regards to traditional research roles, Stephen Clapham wrote “Why The Sell-Side Is Harder Than The Buy-Side.” Joachim Klement responded with “Why the sell-side is NOT harder than the buy-side.” (Both via Substack).
Other reads
“Things Professional Investors Should Say but Can’t,” Joe Wiggins, Behavioural Investment.
Incentives drive behaviour and too often the incentives of professional investors are pointed in the opposite direction of their clients.
“Multi-Manager Platforms: A due diligence perspective,” Brett Kasper, Mercer. Challenges in investigating multi-managers, from centralized firms to pod shops.
“Don’t Be a Buckethead,” Christopher Schelling, Institutional Investor.
By breaking down asset class silos, investment officers can focus on the underlying risks and drivers of return across investment opportunities. And this can allow them to access superior returns per unit of underlying risk.
“Determining the Right Price: A Wealth Management Cost Framework for Families,” Charlie Grace, Cambridge Associates. Costs can vary significantly based upon the complexity of the family structure and the use of alternatives and third-party providers.
“Work-from-Home and the Risk of Securities Misconduct,” Douglas Cumming, et. al, SSRN. Surprisingly, this analysis “reveals that working from home lowers the likelihood of securities misconduct.” (See the seven theories of misconduct.)
“Regret and Optimal Portfolio Allocations,” David Blanchett, Enterprising Investor.
People are not utility maximizing robots, or “homo economicus.” We need to construct portfolios and solutions that reflect this.
”The Devil in the Details,” Zachary Milam, Mercer Capital. The CI Financial transaction was less attractive than advertised; RIA owners: “know your buyer, be skeptical of ‘headline’ multiples,” and realize that “the M&A landscape is changing.”
“Organic growth in the RIA space is fading away,” Jeff Benjamin, InvestmentNews. David DeVoe:
This is a tragedy from my perspective. This industry should be growing faster than 3% or 4%. I think we have a challenge because as an industry we took our eye off the ball.
“Actions for racial equity in the investment management industry,” W.K. Kellogg Foundation. This thorough “workplace transformation guide” includes implementation ideas, case studies, and numerous links to other material.
“Fund Managers Switching Firms — Should You Tag Along?” Mathieu Caquineau, et. al, Morningstar.
Our results show no consistency. The alpha generated at the first firm doesn’t tell much about the alpha generated at the new firm.
“Non-Traded REITs: Personality Disorder or Just Misunderstood . . .,” Alfred Otero, CAIA Association. On the implications of the “remarkable disparity in value” between listed and non-traded REITs.
Wisdom
“The wise man doesn’t give the right answers, he poses the right questions.” — Claude Lévi-Strauss.
Posting
“Models, Morals, and Management in a Trading Room” looks at the dynamics of an investment bank’s trading room. It is the most recent in a series of postings on using anthropology to evaluate investment organizations.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: May 22, 2023
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