A previous edition mentioned an upcoming posting about “the active management reinvention project.”  It’s still coming!  (Reinvention takes time.)

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The energy transition

Larry Siegel wrote a piece, “A Realist Assesses the Energy Transition,” for Advisor Perspectives.  In it, he summarizes the work of Mark Mills, “a physicist, venture capitalist, and energy and technology expert,” and concludes:

If Mills is correct, then preparing to adapt to climate change, rather than trying to prevent it, becomes the most important priority.

Siegel argues for a go-slow approach to energy transition, thinking that it is preferable to actions that limit economic growth too much (and he cites a quote attributed to Tyler Cowen:  “We’re going to see how hot it gets”).

That sparked a response from Sloane Ortel of Ethical Capital, “A Subtle Rebuttal to an Energy ‘Realist’.”  She writes that “the dichotomy between sustainability and prosperity that [Siegel] presents is false.  And his logic is not just flawed, but also seductive and therefore dangerous.”

While Siegel had acknowledged that the continued increase in temperatures presents risks, he felt the trade-offs were worth it because greater prosperity would help to lift the poorest around the world out of poverty.  But Ortel pushes back on that, in that the effects of climate change on the largest equatorial cities will be profound, and therefore not the net-positive that Siegel thinks it will be for the masses.  In any case:

For as long as the world remains imperfect, it’s incumbent upon analysts like me and Larry to embrace the reality that many things can be true at once.  There is no “magic bullet” solution waiting in the wings to relieve our planet’s many stresses, nor a simple tradeoff between economic growth and sustainability.

We are, Ortel says, in “the messy gray area where progress actually happens,” but where we are also at risk from “the malignant overconfidence with which us finance types can sometimes trod through thorny ethical terrain.”  (Which happens to lead nicely into the next topic.)

A business of uncertainty

In his latest memo, Howard Marks writes:

Investors and others who are subject to the vagaries of the macro-future should avoid using terms such as “will,” “won’t,” “has to,” “can’t,” “always,” and “never.”

Yet the investment business is fueled by confidence and bold predictions rather than intellectual humility and probabilistic thinking.  It’s what those who are selling their services do — and what clients have been conditioned to expect.

Marks cites two observations from John Kenneth Galbraith about perennial weaknesses that pervade the investment endeavor — “the extreme brevity of the financial memory” and “the specious association of money and intelligence.”  The bottom line for Marks:

Making predictions is largely a loser’s game.

Model validation

CFA Institute Research Foundation released a monograph, Investment Model Validation: A Guide for Practitioners, authored by Joseph Simonian.  The need and the problem are summarized early on:

To ensure that asset owners have access to investment products that possess the requisite level of robustness, investment firms must have in place a comprehensive model validation process.  However, as critical as model validation is for the reliability and effectiveness of investment strategies, it is remarkable how decidedly unscientific investment strategy development and model validation often are.

The report covers a wide range of issues and practices.  It would be even better if it was separated into two sections for the different audiences it tries to address.  There is much here for non-professional investors such as asset owner trustees, including important caveats and precautions that ought to accompany presentations of strategies by asset managers.  But the text frequently veers into formulae that are only of interest to specialists, so it’s unlikely that trustees (and many investment professionals who aren’t specialists) will wade through it to get to the essential points.

Private equity leverage

Steven Starr of Seward & Kissel posted this chart and comments about it on LinkedIn.  Each of the blue boxes represents a lending arrangement that could add leverage to a private equity investment:

In this hypothetical, there is leverage up and down the structure, but no single lender has the full picture of the multiple levels of leverage.  And while this may be an extreme example, this is not science fiction.

Starr explains some situations that he has observed, and has good suggestions for lenders and allocators alike.

Two related items from the Financial Times:

~ Blackstone “has become one of the biggest buyers of a type of bank loan that has become a lifeline for the private-equity industry,” including those on its own buyout funds.

~ In a rare instance of investors apparently influencing PE fund behavior, the volume of NAV loans has dropped precipitously after pushback from them.

In and out of favor

This comes from Bridgewater’s piece on “The Life Cycle of Market Champions.”  It shows how the dominant companies from each of the last twelve decades have fared over time — a good visual of how the market favorites come and go in dramatic fashion.  The report also includes charts of individual industries that illustrate some notable cycles.

Other reads

“The Right Kind of Stubborn,” Paul Graham.

The reason the persistent and the obstinate seem similar is that they’re both hard to stop. But they’re hard to stop in different senses.  The persistent are like boats whose engines can’t be throttled back.  The obstinate are like boats whose rudders can’t be turned.

“How GIC’s Cautious Experimentation Is Paying Off,” Alicia McElhaney, Institutional Investor.  The large asset owner tries to take a “rifle-shot, cannonball approach” to new organizational and investing initiatives.

“The Venturification of Research & The Resulting Prisoner’s Dilemma,” Michael Dempsey.  Changed dynamics along the spectrum from pure research to startups.

“Can Equal Weight Solve Our Concentration Crisis? Not So Fast…” Ryan Giannotto, Enterprising Investor.

Specifically, equal weight suffers from significant operational costs, underperformance, questionable assumptions, and skewed risk bets.

“Finding Ideas Before Others,” Ian Cassel, MicroCapClub.  How you find ideas — and how ideas find you.

“Old School FX Traders Are Being Replaced by Algos With Names Like Viper,” William Shaw and Alice Atkins, Bloomberg.

As they try to keep up, there’s been a sea change in the type of talent that banks rely on to staff their trading desks.

“All or Nothing — The Importance of Data in Secondaries,” Clipway.  An analysis “underscores the importance of thoroughly examining an entire portfolio during due diligence, especially in the LP-led secondary market, to understand the risk and return profile of the bottom 30% of NAV.”

“Should Canada Require Its Pension Funds to Invest More Domestically?” Keith Ambachtsheer, et al., SSRN.  The Canadian fund business model “has performed remarkably well to date,” but faces outside pressure due to the reduced exposure to Canadian equities over time.

“Have value investors been hindered by this quirk of accounting?” Joseph Taylor, Firstlinks.

Maybe this quirk of accounting goes some way to explaining why systematic low P/E, low price to book strategies haven’t worked as well as they did in the past.  A whole swathe of companies may have been excluded for being too expensive when they weren’t.  A lot of companies only look cheap in hindsight and never at the time.

“Quantifying Sequence-of-Returns Risk for Institutional Investors,” Kevin Machiz, Callan.  Sections include specific looks at the risks for Taft-Hartley plans, public DBs, corporate DBs, nonprofits, and target-date funds.

“Real-Estate Meltdown Strains Even the Safest Office Bonds,” Matt Wirz, Wall Street Journal.  CMBS is the acronym that first comes to mind regarding real estate worries.  Make room for SASB.

“Does ‘Skin in the Game’ Really Matter?” Joe Wiggins, Behavioural Investment.

Skin in the game is an important idea but also one we can get wrong by misjudging where it exists, what it is telling us and when it might be a problem.

The dilemma

“You have two options.  You can stay the same and protect the formula that gave you your initial success.  They’re going to crucify you for staying the same.  If you change, they’re going to crucify you for changing.” — Joni Mitchell.

Flashback: Copying your neighbor

The abstract from a 2003 paper, “Thy Neighbor’s Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers,” by Jeffrey Kubik, et al.:

A mutual-fund manager is more likely to hold (or buy, or sell) a particular stock in any quarter if other managers in the same city are holding (or buying, or selling) that same stock.  This pattern shows up even when controlling for the distance between the fund manager and the stock in question, so it is distinct from a local-preference effect.  It is also robust to a variety of controls for investment styles.  These results can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

Anecdotal evidence (and common sense) indicate that this effect didn’t disappear upon publication of the study.  Decisions by asset managers (and asset owners, advisors, etc.) are influenced by those in their network, especially those with whom they have in-person contact.

Postings

Explore the archives to see the back catalog of evergreen essays, including “When Analysts Throw in the Towel”:

Analysts are expected to be industry experts, but some aspects of the job are performative in nature:  hold recommendations that are implicitly something else; reiterations done for promotional purposes only; earnings estimates that have over time become more and more “adjusted” in order to support a position; and target prices with varying time horizons and no clear delineation of embedded market expectations or stock-specific risk adjustments.

Thanks for reading.  Many happy total returns.

Jason Zweig’s book, The Devil’s Financial Dictionary, is the subject of the latest Investment Ecosystem posting.  (Subscribe here to see all of the content as it is released.)  It is an unusual and fun look at the lexicon of the investment business:

Zweig provides a mix of history, etymology, and satire that takes the book well beyond the typical dictionary.  Skepticism about the language and practices of the investment world is essential for lay investors and professionals alike — and the recurring abuses and calamities of the investment industry come in for deserved cynicism.

On to the readings.

Social investing (A)

In a recent paper, J. Anthony Cookson, et al. provide a review of research into the interplay of social media and investing, “distinguishing between research using social media as a lens to shed light on more general financial behavior and research exploring the effects of social media on financial markets.”  The quantity of papers cited is impressive, showing that the topics have received a lot of academic attention, and a number of important areas of study are covered.

To pick one, how does the “abundant but noisy” content that flows from “non-experts” affect the network structure of information and the behavior of investors (and investments)?

Rather than traditional media editors determining which stories are featured, thus receiving the most attention, social media attention is driven by popularity, often mediated via algorithms.  In turn, this enhances the scope for information cascades and for coordinated sentiment to influence markets.

Social media amplifies human predispositions while introducing new effects:

Is investors’ propensity to place themselves into a financial echo chamber a natural tendency that would exist to the same extent irrespective of social media interactions, or do features of these platforms exacerbate echo chamber behaviors?  In reality, social media both shapes us and reflects fundamental aspects of ourselves.

Social investing (B)

Another kind of social investing is the subject of research by Hoa Briscoe-Tran. et al.  They examine the “S” in ESG, challenging “the common ESG investing approach of amalgamating factors without considering their distinct, potentially contradictory, risk and return implications.”

The study focuses on the MSCI ESG ratings, in which the social category has “two primary components: the human capital score and the product safety score.”  However:

The expected impact of a firm’s social ratings on its future stock returns varies depending on whether the ratings pertain to human capital or product safety.

The two scores have opposite effects:

This divergence questions the practice of combining varied ESG factors into a single score, which can mask the distinct risk and return implications of each component.  Our findings underscore the complexity and diversity within ESG factors, particularly the social dimension, advising investors and practitioners to consider ESG criteria’s individual aspects in investment decisions.

Active, passive, and magnificent

The latest quarterly letter from Ben Inker and John Pease of GMO includes the above exhibit, showing on the left that the annual growth of the multiple on the Magnificent Seven has outpaced the rest of the market, but that the real story is on the right:

The primary driver of the enormous market caps of the Magnificent Seven (Spectacular Six? Fabulous Five?) is — drum roll — the enormity of their EPS growth.

But those stalwarts aren’t the main course in the piece, which is titled “FAQ: Passive Investing.”  Regarding the headline topic, the authors summarized the difficulty of divining the impact of the increase in passive investing:

The problem has instead come from the dilemma of wanting to say fairly definitive things about the impact of passive investing on the stock market when it is exceedingly difficult to make conclusive statements about the effect of a single market change in an environment in which many other things have also changed over the same basic time scale.

Among the topics discussed are the differences in scale economics for active and passive funds; how the effects from the growth in passive depend on which investors are making the switch to it; and the different incentives for plan sponsors managing defined contribution plans versus defined benefit ones.  Of note, although markets have changed a lot in the last few years, most multi-asset portfolios look a lot like they did before:

This suggests that the elasticity (read: price sensitivity) of multi-asset investors isn’t particularly high.  Some of this is due to tight benchmark constraints, some of it is just inertia.

The bottom line:

The reality, then, is not so much that the rise of passive investing ruins markets, but only that it changes them.  It changes how much short-term investors should care about flows.  It potentially changes how much long-term investors should bank on mean reversion.  It changes how all investors should think about correlations, seeing as both passive flows and passive allocations might mechanically introduce (or reinforce) sources of asset co-movement.

Morningstar conference

A pair of columns in the latest Mutual Fund Observer include perspectives on the Morningstar Investment Conference.  The first item in David Snowball’s ten takeaways notes that “it’s not a conference for investors anymore”:

It might simply be a healthy evolution that financial planners are spending less time on things that are hard and iffy (selecting up-and-coming managers) and more time learning about “winning the next generation of high-net-worth investors.”

He also mentioned that Morningstar waived the admission fee for advisors who would attend three sponsored sessions — and gave a description of the exhibitor hall that made it sound moribund.  (Many conference organizers are wondering how to reinvigorate their previous models in a post-pandemic world.)

Charles Boccadoro provided an in-depth review, including lists of hot and not-so-hot topics.  Among other things, he said a panel “expressed an almost nostalgic desire for more in-depth articles with less click-bait titles, but also the recognition that this desire is at odds with today’s media business model.”  That is telling, since many of Morningstar’s own web offerings are fronted with click-bait titles in a way that they didn’t used to be.

Commercial real estate

Since 2005, Tadas Viskanta has been the go-to source for the daily curation of investment reads.  One recent set of links included three articles on commercial real estate that provided a good summary of the state of the market and the actions of the big investors most exposed to it:

“Fearing Losses, Banks Are Quietly Dumping Real Estate Loans” (New York Times).

“Real Estate Bets Gone Wrong Roil $1.24 Trillion Canadian Funds” (Bloomberg).

“Property group boss likens UK office values to ‘melting ice cubes’ ” (Financial Times).

Generating commentary

Perhaps the only thing worse than having to read portfolio attribution summaries period after period is having to write them.  Don’t fret, a machine will take care of it for you.  For example, clicking “generate commentary” in this FactSet application will spit out the copy.  But is it as good at painting things in a favorable light?

Other reads

“The Last 72 Hours of Archegos,” Ava Benny-Morrison and Sridhar Natarajan, Bloomberg.

Weeks of testimony have exposed cringeworthy misjudgments and costly blunders in various camps throughout the crisis — hardly Wall Street’s preferred image of calculated risk-taking.  Bankers, for example, painfully acknowledged how they relied on sometimes-vague or evasive trust-me’s from Archegos while doling out billions in firepower for Hwang’s bets.  That confidence melted into confusion . . .

“Hedge Funds: A Poor Choice for Most Long-Term Investors?” Richard Ennis, Enterprising Investor.  On balance, they are “alpha-negative and beta-light” and investors mute the performance of the best ones by over-diversifying.

“Optimization and Evolutionary Dead Ends,” Christopher Schelling, LinkedIn.

An optimization is quite literally best fit to one environment — that’s what it means.  But when environmental conditions are not as expected, optimization is what creates fragility.

“Balancing Innovation & Control,” Capco.  An accumulation of articles regarding governance issues, primarily in the areas of technology and sustainability.

“Elephants in the Investment Committee Boardroom,” True North Institute.  Among ten top-of-mind issues for asset owners:

1) The long-term prospects for private equity

2) Artificial Intelligence: investment opportunities and the impact on our investment process

3) Illiquidity management: managing PE capital call cash requirements as distributions dry up

4) Alpha from public equities: active vs passive debate

5) Rethink our ESG Policy (making it more practical)

“Broyhill Book Club 2024,” Broyhill Asset Management.  This year’s compilation, with links to previous editions.

“BlackRock throws support behind effort to move pensions beyond ESG,” Lee Harris and Brooke Masters, Financial Times.  Regarding the Alliance for Prosperity and a Secure Retirement; Tim Hill, a retired Phoenix firefighter who is president of the alliance is quoted as saying:

We are not pro-ESG.  We are not anti-ESG.  What we are is ‘pro’ letting investment professionals, who have a fiduciary duty to their beneficiaries, do the work that they’re supposed to do.  We are ‘anti’ politicians, from either the right or left, interfering with that fiduciary duty so they can carry out a political, social agenda.

What room are you in?

“If you’re the smartest person in the room, then you’re in the wrong room.” — Richard Feynman.  

Flashback: Ray DeVoe

In the days when research reports were found on paper rather than pixels, you could walk into a portfolio manager’s or analyst’s office and see whose work was getting their attention (although most noticeable were the large stacks of unread research piled around).

You might very well see “The DeVoe Report” from the firm of Legg Mason Wood Walker.  Ray DeVoe was an old-school analyst who was unafraid to point out the follies of the business.  His 2014 Bloomberg obituary cited two phrases for which he became famous (each of which is referenced in Zweig’s The Devil’s Financial Dictionary).  He originated the term “dead cat bounce,” and Warren Buffett among countless others has quoted his maxim, “More money has been lost reaching for yield than at the point of a gun.”

Postings

Check out the archives to find earlier editions of the Fortnightly and original essays that target the important problems faced by investment organizations and professionals.

For example, in 2023, proposed rules for investment advisors from the SEC prompted a posting, “The Outsourcing Debate: Principles and Rules”:

While the proposed SEC rule is getting the attention, the general questions behind it are what’s most important.  How good are advisory firms at assessing the trade-offs — for their clients, not themselves — of the range of outsourced services that they are employing?  How well can they judge the quality of those providers?  Does their own circle of competence qualify them to evaluate that of others?

Organizations should want to get better at all of this, whether the rule forces them to do so or not.

Thank you for reading.  Many happy total returns.

The next essay on the Investment Ecosystem is tentatively titled “The Active Management Reinvention Project.”  (Sign up to receive all postings via email as they are published.)

On to the latest crop of readings.

Selection algos

A pair of briefs from Addepar written by Dane Rook and Dan Golosovker address the manager selection process.  The first, “What’s Your Algo for Manager Selection . . . and How Good Is It?” says:

An investor’s processes for manager selection can materially impact their portfolio-level returns.  However, many investors struggle to think analytically about their selection processes and do not know objectively how good those processes are or how to improve them.

The briefs specifically address the evaluation of managers in private markets, but the ideas apply equally to public mandates.  The “false temptation of past performance” is the big problem; the authors instead want to identify the “deeper drivers of performance that can function as high-confidence signals of future results.”  But most selection processes fail the tests of a good algorithm; furthermore:

Many investors’ selection algos aren’t codified anywhere, which not only limits their consistency, accuracy and efficiency, but also reduces their amenability to “debugging.”

In practice, investors have “an unfortunate satisficing tendency”:

They often focus their deep diligence on what information is offered to them by prospective managers, rather than demanding the information that matters most.

The theoretical characteristics and steps to be taken are fleshed out — and augmented by the second brief, “The ‘Algorithmic’ Mindset for Selecting Best-Fit Manager in Private Markets.”  A footnote speaks to the title:

We emphasize “best-fit” managers, because the managers that deliver the best returns might not be the managers who are the most appropriate [for the] investor:  there is also a need to factor in alignment, contribution to portfolio-level diversification and risk management, and various other relevant properties.

(The critical “deep diligence” phase referenced by the authors is at the heart of the Advanced Due Diligence and Manager Selection course.  Also of note:  Many of the shortcomings mentioned in terms of the imprecision of selection algorithms also apply to the investment processes of fundamentally-driven asset managers.)

Better deals

Emily Holdman of Permanent Equity, a firm that manages multi-decade private equity funds, wrote a report called “Better Deals.”  In a series of short and interesting chapters, it examines the dynamics of negotiation and the behavioral tendencies that come into play — and serves as a cultural yardstick for a broader range of investment management deal making.

The final section is “Ask All the Questions: Overcommunicate and Don’t Assume Anything.”  It includes:

People sometimes limit their inquiries to avoid appearing ignorant or difficult.  This is exactly the kind of self-sabotage that leads to poor outcomes.

Questions are a cornerstone of real relationships (along with listening).  Interest in the other party is healthy, not intrusive.  Dialogue develops mutual understanding.  Which can lead to trust.  Which, ultimately, results in better deals.

In parts of the ecosystem without a multi-decade time horizon, the pace is more frenetic and (it seems) the actions more cutthroat, but the advice still applies.

A shared interest

In “A Shared Interest: Do Bonds Strengthen Equity Monitoring?” Todd Gormley and Manish Jha investigate how corporate bond holdings at asset managers affect their monitoring and voting of their equity positions.  From the paper:

Investors influence governance through a combination of voice (managerial engagement and voting) and exit (selling one’s position).  Lacking the ability to participate in shareholder votes, bond investors are typically not thought to play an important governance role, and commonly used measures of institutional investors’ incentive to be engaged stewards focus solely on their equity positions.  However, bond investors have many reasons to be concerned about firms’ governance structures, which can influence bond values (via increased firm value), credit ratings, and the likelihood of repayment.

The authors “find evidence that institutions’ bond holdings predict their stewardship activities,” highlighting “how the determinants of institutional investor attention are more complicated than typically assumed.”

(Because firms differ structurally and culturally, the amount of information sharing across asset classes varies quite a bit from manager to manager.  It would be fascinating to see how those firm-specific factors are reflected in their unique voting patterns.)

Private markets

This image comes from “Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management,” a report from CAIA Association.  The stylized view could be improved with the addition of key categories of public assets, especially since the report says that one way to change perceptions about private market vehicles “is to position private markets exposure alongside public markets exposures”:

By removing the imaginary line between private and public markets, investors begin to conceptualize their allocation to “alternatives” instead as exposures that are an important part of the overall [portfolio] construction.

The challenge for an association of analysts whose credential has “alternative” in its name is to avoid the excesses of the “alts for the masses” push of product providers and to faithfully execute the fiduciary responsibilities that are the foundation of wealth management — at a time when the opportunity set is different than the one that created the historical record.  It’s a tough balance between the two forces, as is evident in the text.

Another credentialing body, CFA Institute, has published “Private Markets: Governance Issues Rise to the Fore.”  The report includes information from a survey of CFA Institute members, recommendations for investors and policymakers, and a section on “the end of the era of cheap money” and its implications for governance.  Of particular interest is the sixth chapter, a primer on governance issues in private markets which serves as a good introduction for investment advisors and asset owners alike.

With an asterisk

There have been several articles of late about private equity managers buying positions on the secondary market (at a discount) and immediately marking them up to their last official valuation.  For one, an Institutional Investor piece by Michelle Celarier examined this “sleight of hand,” legal as it is.

As mentioned there, secondaries have been a hot spot in a sluggish private equity landscape, with those markups aiding performance.  Buying such exposures on the cheap can be a value-adding strategy, but the instant gains may mislead investors, who are prone to imagining repeatability and chasing returns.  The numbers should be thought to come with an asterisk until those revaluations are sized and gauged as to the likelihood that they will last.

Other reads

“Six Words for a Capital Raise: ‘Slow is Smooth. Smooth is Fast.’ ” John-Austin Saviano, High Country Advisors.

Whatever the reason, an overeagerness to tell your story risks it being told badly, wasting priceless introductions, and the process becoming an awful slog.  Create a generic deck, run unstructured meetings, and give meandering answers and you’ll find yourself pushing on a string.

“Market efficiency and value added by listed and unlisted U.S. institutional investor real estate portfolios,” Alexander Beath and Maaike van Bragt, CEM Benchmarking.  A 24-year study, including the “proportions of investors outperforming by year and the implied probability that investors have skill in alpha generation.”

“How Do Public Pension Plan Returns Compare to Simple Index Investing?” Center for Retirement Research.

Over the full period [2000-2023], plan returns are virtually identical to the simple index strategy, but plans have done much worse since the Global Financial Crisis.

“A tl;dr for annual reports: same is good, change is bad,” Bryce Elder, Financial Times.  Two studies of the language of corporate filings.

“Betting with a Weak Hand,” Joe Wiggins, Behavioural Investment.  On poker and investing:

We are not sure what a strong hand is.

We will misjudge when we have a strong hand.

We will play too many hands.

“Janus Henderson’s Ali Dibadj: ‘You’ve just got to roll with the punches’,” Brooke Masters, Financial Times.  The challenges of managing a large asset manager that resulted from the merger of disparate firms.

“Seven Questions About Proxy Advisors,” David Larcker and Brian Tayan, Stanford Business.

The proxy advisory industry is marked by considerable controversy regarding its purpose, influence, value, and objectivity.

“Nvidia to get 20% weighting and billions in investor demand, while Apple demoted in major tech fund,” Jesse Pound, CNBC.  The unexpected effects of an “index” rule.

“Dilemma on Wall Street: Short-Term Gain or Climate Benefit?” Lydia DePillis, New York Times.  (Note:  This topic will be the subject of an upcoming Investment Ecosystem essay.)

Portfolio managers have conflicting incentives as the economic and financial risks from climate change become more apparent but remain imprecise.

“The Cultures that Actually Win,” Gapingvoid.  Charlie Munger and Amish barn raising; “trust is everything.”

The key question

“Why are we doing it this way?” — William Donaldson, a founder of DLJ; his NYT obituary said he thought it was “a question that can be asked about everything.”

Flashback: The Five Percent Club

A 2023 article in the StarTribune answered the headline question:  “Minnesota was once a leader in corporate philanthropy. Is that still true?”  The backstory:

Nearly five decades ago, the Five Percent Club put the state on the map nationally as a leader in philanthropy.  Target and 22 other Minnesota companies vowed to give away 5% of their pre-tax earnings to charity — the first group of its kind in the nation.

Actually, it wasn’t called Target at the time; the discounter was part of Dayton Hudson then, and the pledge was at the parent level.  The Club got its name because the firms “gave 5% of their earnings before taxes back to the community.”  Today, the members of the broader Keystone Program give at least 2%, with half reaching the 5% level.

The “shareholder value” movement kicked in around the time of the formation of the Five Percent Club — and the debate between the two ways of thinking continues today.

Postings

The archives include all of the previous editions of the Fortnightly.  For example, “Becoming a Learning Organization” taps observations from the CIA (like the one below) and applies them to investment organizations:

Institutional learning from those directly involved in events can provide context for situations of the future.  As time passes, people move on, memories fade, and important lessons are lost — or misremembered.  After-action reports of significant events can illuminate investment dilemmas of the future and, perhaps more importantly — if objectivity versus blame drives the culture and interviews are conducted with that intent — the social and psychological factors that affected those involved.

Thank you for reading.  Many happy total returns.

Welcome to another edition of the Fortnightly, your source for interesting stories and ideas from around the investment ecosystem,  (Subscribe here to receive each new Fortnightly and original essays via email.)

The most recent posting on the site, “Recognizing the Risk of Flow-Driven Performance,” looks at a new paper that analyzes the impact of inflows (and outflows) on performance for liquid strategies.  That effect trips up allocators in subtle and not so subtle ways.  The paper uses “bubble ETFs” to show what happens when funds have ownership stakes that are large in comparison to the daily volume of their holdings.

The investment manager playbook

A previous edition of the Fortnightly covered “The Investment Office Playbook — What Managers Don’t See,” by Ted Seides.  Now he has shifted to the other side of the table, with a posting on “The Investment Manager Playbook: What Allocators Don’t See.”  It is an answer to these eternal questions:

Don’t managers know size is the enemy of performance?  Why are all these managers so greedy?

Which boils down to:

The investment manager’s playbook hinges on its decision to stay the same or grow.  That choice carries implications for the team, investment opportunities, and risks the manager will encounter to maximize its probability of long-term outperformance.

In almost any rational assessment, the playbook favors growth.  Expanding organizations can attract and retain talent and capital, which creates durability.  Staying the same may benefit from focus, but it carries significant business risk.

Seides walks through two choices over time — growth or “stay the same” — to illustrate why managers choose to get bigger despite the risks to the performance of its initial strategy.  The backdrop for all of it is the instability of the existing asset base because of investors who are quick to fire in response to the variability of performance (that comes with the territory of active management, although expectations in that regard are often out of whack).

While the write-up faithfully presents the mindset of managers in making the choice to expand, a couple of points of pushback:

~ The dilution of performance that (normally) accompanies larger asset sizes and the dilution of skill that (normally) results from expanding into new strategies may be acceptable trade-offs for an asset manager in order to build a more stable business, but asset owners still should be wary of those moves.

~ “Growth” need not involve just scale and complexity.  Too many firms “stay the same” by not focusing on continuous improvement of their existing strategy and their communications about it.

The Baylor way

There are few asset owners who actively use social media to promote their thinking about the what, how, and why of their approach.  Dave Morehead of Baylor University is one of the exceptions.  His feeds on LinkedIn and “Twitter” offer ongoing perspectives on investment and organizational issues of interest to both fellow asset owners and other industry participants.

A March article by Alicia McElhaney for Institutional Investor focused on how Morehead builds his team, given that attracting talent to Waco, Texas can be a challenge.  The first of three recent With Intelligence updates by Marc Hogan addresses Baylor’s manager selection process.  In it Morehead describes what he says to its managers when they are hired:

In general, we are going to be taking money from you when everyone else is giving you money, and everybody hates it when you redeem.  On the flip side, when they’re all redeeming from you and I’m tripling my allocation to you, you should really like that.

Years ago, Charley Ellis described the philosophy of the best institutional allocator he had seen.  It was the same one as Morehead outlined.  Another focus in the With Intelligence piece was Baylor’s willingness to ask more personal questions of managers than others doing due diligence.  (That’s one topic in this course from the Investment Ecosystem Academy.)

Social media presence and press coverage can cut both ways, but Morehead has made a name for his school in the investment world by offering greater transparency than others.  Will more take the same path?

AI corner

For most people, the age of AI started eighteen months ago with the public introduction of ChatGPT.  This chart provides a bit more perspective on developments in the field.

It comes from Citi’s report, “What Machines Can’t Master: Human Skills to Thrive in the Age of AI.”   It includes sections on competitive advantage (computers versus humans), the most valuable human skills according to a variety of experts, and the training and development of those skills.

Two other things you might not have seen.  An intriguing paper by Mohammad Atari, et al., “Which Humans,” considers the implications of the narrow base for many large language models:

This systematic skew of LLMs may have far-reaching societal consequences and risks as they become more tightly integrated with our social systems, institutions, and decision-making processes over time.

And, in a posting on Marginal Revolution, Alex Tabarrok writes that “a spot-market for hiring AIs is developing.”  Expertise in understanding the strengths and weaknesses of various AI capabilities will be essential (especially in the investment world).

Banks

Tabarrok also posted this stunning chart of unrealized losses at U.S. banks.  Ominously, that note is titled “Bailouts Forever.”

Mood

Since Ark Invest lost its mojo (by chance, its decline started within days of this early Investment Ecosystem piece), Cathie Wood has become known for her regular predictions about stocks, markets, and the economy that seem well beyond the realm of possibility.  On May 23, she wrote, “In our view, the search for cash and safety in the equity markets today is as intense as that during the Great Depression in the early 1930s.”

Granted, sentiment is not always easy to divine, but since she posted that view, Nvidia is up another 25% and its CEO has gained celebrity status, including being asked to sign a woman’s chest.  (After asking, “Is that a good idea?” he did it anyway.)  A whiff of lower interest rates last week goosed a bunch of speculative plays.  And Roaring Kitty has reanimated the meme-stock crowd.

“Is that a good idea?” would seem to be the question of the day.

Zen-like

A way to think about due diligence.

Other reads

“Stock Market Concentration,” Michael Mauboussin and Dan Callahan, Morgan Stanley.

What feels disconcerting to many investors is that the rate of increase in concentration in the last decade is the most rapid since 1950.

“Rating on a Behavioral Curve,” Utpal Bhattacharya, et al., SSRN.  Analysts rate the firms that they cover relative to each other.  What are the implications of that (and the opportunities presented by it) when looking across the full range of analysts?

“The Long-Run Performance of Public Pension Funds in the US,” Richard Ennis, SSRN.

We identify two distinct eras of public fund performance, separated by the Global Financial Crisis of 2008 (GFC).

“Does diversity add value to asset management?” Tommi Johnsen, Alpha Architect.  A review of an academic article on diversity and hedge fund performance.

“Is ESG a Luxury Good?” David Larcker, et al., Stanford Business.

If demand for ESG follows the economic pattern of a luxury good rather than a basic necessity, boards will want to rethink how they plan, prioritize, and invest in ESG.  They can expect demand for ESG will not be static but reflect whether the economic cycle is favorable or unfavorable.

“It Is (Still) Time for LP’s To Be Accountable . . .,” AIM13.  “A compendium of things to look for in private equity LPAs.”

“Direct Lending Unlikely To Deliver Promised Returns,” Joseph Bohrer, LinkedIn.

Direct lending funds, desperate to invest all the money they raised, are taking more credit risk, accepting worse terms, at lower yields.

“Continuation Funds: What You Need To Know,” Greg Norman et al., Harvard Law School Forum on Corporate Governance; and “The Growing Popularity of Continuation Funds,” Hayley McCollum, Marquette Associates.  Basic information about these increasingly important vehicles.

“Regarding the Usage of Cash Hurdles in Incentive Fee Arrangement,” an “open letter” from a group of large asset owners and consultants.

The long-term health of the industry is dependent on a healthy alignment of interests between GPs and LPs, and we believe incentive payments on true value-add fixes a misalignment that has been present in fee structures throughout the maturation of the hedge fund industry.

“The Investing Boom That’s Squeezing Some People Dry,” Jason Zweig, Wall Street Journal.  Implications for individuals and their advisors when products that are easy to get into are hard to get out of.

Talk is cheap

“A principle is not a principle until it costs you money.” — Bill Bernbach.

Flashback: An intern at Enron

It’s intern season, which makes it a good time to read Giuseppe Paleologo’s “Memories of an Enron Summer.”  The short piece recounts his time as an intern at the firm the year before it blew up.

The author captures the cultural environment there and the belief that animated Enron’s feverish rise and even more dramatic fall, but he “couldn’t understand how Enron made money.”  He spreads the blame for the company’s failure more broadly than some accounts.  Everyone wanted in on the game:

It was self-organizing bad behavior.  What was the mechanism, though?  My explanation is that Enron became very successful at something (gas trading) and as an organization it extrapolated that success could be achieved in anything it set its mind to.  This enabled two classes of behaviors, each feeding on the other.  First, an entrepreneurial hypertrophy, and associated excess risk taking:  every new idea should be pursued, because it was new.  Second, controls and processes were seen as obstacles.

Most interns are trying too hard to please those in charge to notice the incongruities around them.  But, as we say around here, “all organizations are messy,” although not normally to the degree of Enron.

Postings

The archives include all of the previous editions of the Fortnightly.  Among the postings are several series, including one on Bill Gross and Pimco.

Thank you for reading.  Many happy total returns.

No matter your particular taste in music, you are likely to have an interest in the most recent posting on the site, “The Music of Investment Genres and Processes.”  The analogies offered will help you think about industry practices (and communicate with others about them).

If you find these Fortnightly editions and the other essays helpful, please recommend The Investment Ecosystem to your co-workers and friends.  If you’re new and want to subscribe (for free!), you may do so here.

The robots are coming here

Nathan Dong begins his paper, “Can AI Replace Stock Analysts? Evidence from Deep Learning Financial Statements,” with a screenshot of a headline from the New York Times Magazine, “The Robots are Coming for Wall Street.”  (That article was published more than eight years ago.)

Using deep-learning techniques (and an inexpensive setup), Dong’s approach “outperforms human analysts in 12-month-ahead target price forecasts by a large margin.”  The abstract concludes:

Overall, the results of this research support the notion that AI has the potential to replace human analysts in certain aspects of predicting financial performance.

Figuring out what the machines can do better than the humans is a point of focus these days.  Target prices are low-hanging fruit.  Dong suggests that the lagging forecasting performance of analysts “reflects the degree of optimism bias or the need to curry favor with companies’ management.”  Another potential factor is unveiled via the research methodology:  adding interest rate information was helpful in improving the performance of the AI model, but most sell-side analysts don’t pay much attention to it.  Plus, target prices are promotional devices for selling ideas — and analysts can sometimes get into leapfrogging games to have their targets stand out from others.  Using information available to all, the machine outperforms by removing longstanding behavioral distortions that are an accepted part of assigning target prices.

Another paper, “Financial Statement Analysis with Large Language Models,” by Alex Kim, et al., includes this conclusion:

Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes.  The LLM exhibits a relative advantage over human analysts in situations when the analysts tend to struggle.

Much more to come.

Embrace the mania?

A report by Que Nguyen of Research Affiliates counsels readers to “Learn from Last Tech Bubble to Embrace GenAI Mania.”  It provides some history of the dot-com period, performance comparisons of a few notable companies of that era, and favorable words for the economic progress that comes from manias “despite the misallocation of much capital.”  As far as investing lessons:

Those who invested in profitable, well-capitalized tech companies in 1996 fared well over the long term.   Those who piled into speculative companies at the height of the mania while eschewing “old economy” stocks often experienced significant losses.

For the current case:

If investors believe that GenAI will be as impactful as the internet, they will need to participate by getting invested, and the best approach will be to stay diversified and be prepared to hold through ups and downs.

John Rekenthaler of Morningstar also compared today’s environment with the dot-com era, coming to a different conclusion, that “with internet stocks, most of the industry’s future leaders arrived not with the first wave of technology, but the second.”

In “The Alpha Cycle,” Joe Wiggins opens with a cautious reminder:

Industries in which capital has become abundant and optimism unbridled often end up disappointing investors.

And, in the process, the “intoxicating mix of unusually strong performance and seemingly irrefutable narratives draws increasingly large flows” to the asset managers who most embrace the mania, setting up a classic error in manager selection:

Selecting active fund managers who have enjoyed prodigious tailwinds comes with twin challenges.  First, we are likely to grossly overstate the presence of skill (we cannot help but conflate performance with skill).  Second, even if they do possess an edge, it is unlikely to matter because the odds of investing successfully in an area that already has stretched valuations and delivered exceptional performance are poor.

Real estate questions

Two property funds — Blackstone Real Estate Income Trust (BREIT) and Starwood Real Estate Investment Trust (SREIT) — continue to raise eyebrows among market watchers, while their sponsors try to convince investors that the bottom is nigh.  Cash flows fell below dividends in 2023 and each fund has had redemption requests exceed stated caps at times.  The monthly limit for withdrawals for SREIT was just slashed, with this explanation:

[As] a fiduciary to our stockholders, we cannot recommend being an aggressive seller of real estate assets today given what we believe to be a near-bottom market with limited transaction volumes, and our belief that the real estate markets will improve.

Two articles focus on the uncertainties around BREIT, which is significantly larger than SREIT.  The New York Times gives a short synopsis of the issues, while a subheading on a much longer piece from Business Insider wonders whether BREIT is a house of cards.

The essential question is shrouded in fog, since no one knows what the properties in the portfolios are worth.  That means that there are potential issues regarding the fairness of prices for incoming and outgoing investors (and for the fees based on net asset value).  With the increased popularity of semi-liquid alternative investments, these concerns are bound to be an area of attention for quite some time.

Endowment performance

True North Institute published the first report in a promised “performance ranking series,” this one focused on large U.S. university endowments.  The four conclusions:

Outperformance or alpha is becoming more difficult to generate for even the most capable of institutional investors.

Total portfolio absolute returns are primarily driven by the overall risk budget of the portfolio including large allocations to illiquid asset classes — primarily comprising private equity.

It is not clear that the large endowments are outperforming the average private equity and venture capital investor.  High allocations to private equity do not necessarily translate into high overall portfolio alpha.

We do not assume that private equity and venture capital will deliver the same level or consistency of returns in the future.  Endowments with more diversified sources of illiquidity premium may outperform in the future.

Faltering factors  This image is from “A Guide to Factor Investing,” by Alex Goroshko of NEPC.  It aptly demonstrates the quandary of the day:  The two factors, size and value, that were thought to be the most reliable (and which became the backbone of many investment strategies) peaked in performance around the time when factor investing dramatically increased in popularity.

Other reads

“Banks in Disguise,” Marc Rubinstein, Net Interest.

Unzip companies across a range of industries . . . and you will find financial companies lurking inside.

“Portfolio Construction & the Lower Middle Market,” Tim Hanson, Permanent Equity.  How to think about building a portfolio of private companies for multi-decade performance.

“Behind the J-Curve,” Juliet Clemens, PitchBook.

In due time we shall see whether recent vintages can make remarkable recoveries to get ahead of the curve rather than remaining behind it.

“In the Thick of It: How Performance Teams Are Driving Value Across the Organization,” FactSet.  There have been significant changes in this area over the last few years, including much more remote/hybrid work, expanded responsibilities, greater integration with other teams, and an increased need for new skills.

“Multi-strategy hedge fund primer: deep dive into diversification,” Aurum.

Multi-strategy hedge funds are not a homogeneous group and they can vary enormously; adopting different business models, areas of focus, risk parameters, levels of concentration, liquidity requirements and fees.

“The Economics of Private Equity,” Alexander Ljungqvist, CFA Institute Research Foundation.  This literature review summarizes major research findings regarding private equity and includes a helpful bibliography that includes conclusions from a wide variety of analyses.

“An Open Letter to Vanguard CEO, Salim Ramji,” Dave Nadig, Echo Beach.

Vanguard is entirely opaque.  Your ads all promise me that there’s value in being an owner.  So show me!

“Hedge funds hit by lack of private equity exits,” Harriet Agnew, Financial Times.  The denominator effect and assets tied up in PE affect the allocation to other strategies in the “alternatives” category.

“For the Analyst: Peer Benchmarking Methods to Improve Earnings Forecasts,” Ahmet Kurt, et al., Enterprising Investor.

Finding suitable peers for financial analysis is a vexing task that requires careful consideration of firms’ underlying economics, accounting choices, and financial statement presentation.  But without comparable financial statement information, peer benchmarking may yield less meaningful and even misleading insights that negatively impact earnings forecasts.

“Initial Observations Regarding Advisers Act Marketing Rule Compliance,” SEC.  Early indications of shortcomings in implementation of the new rule, including, “Advertisements stating that the advisers were ‘free of all conflicts,’ when actual conflicts existed.”

Find a partner

“Nothing clears up a case so much as stating it to another person.” — Sherlock Holmes (from Silver Blaze by Arthur Conan Doyle).

Flashback: Early warning

A year and a few days before 9/11, Inferential Focus sent its clients a briefing, “Bombs and Networks: New Terrorist Organizational Tools and Western Intelligence.”  It warned of an increased level of terrorist activity and the development of new organizational structures made possible by improved networking capabilities.

While citing other groups, the focus was on the Arab Afghans, led by Osama bin Laden, which we would soon enough learn to call Al-Qaeda.  The briefing ended:

Thus, the issue becomes:  Who is evolving faster — networked terrorist organizations and their communications systems or Western intelligence services?  Bombs and networks are forcing bigger and faster changes in intelligence realities.

The references to Hamas in the piece are a reminder that nearly a quarter century later intelligence services have trouble understanding the potential threats emanating from those networks.

Investment risk management — which doesn’t involve matters of life and death — likewise often suffers from a lack of attention to changes in the established order of things.

Postings

The archives are full of essays that might interest you.  For example, here’s a bit of “The Red, Amber, and Green of Performance Tests, a posting from 2022:

Explicit and implicit performance rules are often applied without consideration as to whether they add value or not — since they just seem right — even though they are often counterproductive.  Therefore, it makes sense to identify and assess them, and to design organizations to minimize the bad decisions that can result.  This is especially difficult given the chains of agents that reinforce the tendencies.

For example, an institutional asset owner may have to deal with layers of tests applied by consultants, in-house due diligence analysts, the CIO, and the investment committee.  Someone at an advisory firm may use an outside research firm for ideas, need to hew to the buy list of a centralized due diligence function, make a presentation to their investment committee — and then have to sell the idea to clients.  At each stage, performance exerts a gravitational pull on those involved.

Thank you for reading.  Many happy total returns.

 

Today is the sixteenth anniversary of the debut of “the research puzzle” blog, which laid the foundation for this site.  A special thanks to those who have been reading across the years.

In addition to content, The Investment Ecosystem offers consulting, training, coaching, and facilitation for investment organizations and professionals.  For more information, see our website to schedule a virtual meeting.

The most recent posting on the site, “The Advisory Dilemma: Personalized or Systematic?” deals with the important decisions that advisory firms must make in terms of the nature of their services.

A blank slate

Here’s your assignment:  Manage a pool of $47 billion, starting from scratch.

That’s the job that John Barker, chief investment officer of the Mastercard Foundation, has, as outlined in an article from Institutional Investor.  Not only constructing the portfolio but building the organization.

What would you do if you were in his shoes?  How much would your solutions to this unique opportunity mimic what everyone else is doing?

Changing circumstancesWe all know that markets are continually evolving, even though we sometimes act as if we can lock down an approach that will work for all time.  The above image came from Bloomberg.  It shows the dramatic change versus four years ago in terms of the effect of increases in Treasury yields on the prospect for positive (nominal) returns.

Other reminders of fundamental changes come from Morningstar’s “Diversification Landscape 2024” report.  Here’s its sixty-year look at the correlation between Treasuries and large stocks:

And one since 2002 that shows how significantly two equity sectors have varied in correlation to the market (and that technology has not):

For a longer view, Bryan Taylor went back to 1251(!) to divide the past into five financial eras and twenty historical periods.  (Paper here.)

Each period is separated by geopolitical events, such as the end or beginning of a war (1815, 1914, 1945), a stock market bubble (1720, 1929, 2000), a secular low or high in interest rates (1896, 1981, 2020) or similar events.  These events signal a change in the zeitgeist of the period and consequently a change in the returns to stocks, bonds, bills and the equity risk premium.

We have found that high returns in one period are followed by low returns in the next period and vice versa.

Taylor places us in the era of globalization, which he has beginning in 1982.  However, he breaks that era into three periods, the latest starting in 2020, the title of which heralds a potential shift to a completely different era:  de-globalization.

Deepfakes

Angelo Calvello wrote an opinion piece for Pensions & Investments, “Deepfakes — the next threat for investors.”  A video example created for demonstration is included, plus some plausible scenarios in which a deepfake could be used to fool investors.  Particularly troubling:

Deepfakes are created by using deep learning technologies (hence the “deep” in “deepfake”), often generative adversarial networks (or GANs).  Yet, despite the complexity of the underlying technologies, almost anyone can manipulate videos, audio and images to create deepfakes without the need for extensive programming skills.

The emerging risks point out the need for good operational due diligence:

Because allocators and managers depend on third parties (custodians, fund administrators, brokers, etc.) to provide critical services, their due diligence process should include a rigorous assessment of the vendors’ digital security policy and procedures.

Legends

Jim Simons, the iconoclastic founder of the mysterious and wildly-successful Renaissance Technologies, passed away at 86.  Gregory Zuckerman, who authored the book The Man Who Solved the Market about Simons, wrote a remembrance for the Wall Street Journal.  Ted Merz summarized Simons’ five very short guiding principles.  (In 2017, the New Yorker published a very good article on the research center Simons created after leaving the active management of Renaissance.)

“Woodstock for capitalists” — the Berkshire Hathaway annual meeting — was held on May 4.  The absence of Charlie Munger (who, according to Warren Buffett, was peaking when he died at “the age of 99.9”) and Buffett’s own advanced age gave the meeting a different feel than in years past.  In a poignant moment, a boy asked the question, “I’m wondering if you had more day with Charlie, what would you do with him?”  Here’s the video.

Debt

Morgan Housel wrote a posting about debt and the volatility of life (“Not just market volatility, but life world and life volatility:  recessions, wars, divorces, illness, moves, floods, changes of heart, etc.), using a series of simple images, including this one:

The black lines stay the same, but one image has very wide red bands (representing how low levels of debt mean that the effects of the volatility are largely a non-issue) and one very narrow ones, which present a different state entirely.

Seeing the posting prompted Howard Marks to write a short essay on “The Impact of Debt.”  The use of leverage is a factor in the management of companies and of portfolios, and attitudes about it vary significantly over time in response to changes in the environment.

Other reads

“The Curious Case of Catalysts,” Joe Wiggins, Behavioural Investment.

There are problems in each of these components — we are poor at making predictions about future events, we aren’t great at forecasting the reaction of other investors, and things are never constant.  Other than that, we are all set.

“Big Tech Capex and Earnings Quality,” John Huber, Base Hit Investing.  How will the huge increases in capital expenditures by the big tech companies affect their returns (and investor perceptions of them)?

“The OCIO Mirage & Investment Office Costs,” Charles Skorina.

If the goal is to deliver superior performance, service, and solutions and be there for multiple generations and perpetual institutions, who is most likely to endure and deliver?

“Looking for the exit: Oregon battles overweight allocations to illiquids,” Sarah Rundell, Top1000funds.  One example of how a fund adjusts its portfolio construction in response to the denominator effect (private market assets at the Oregon Public Employees Retirement Fund are now 55% versus the target of 40%).

“Don’t tell me how I am doing,” Joachim Klement, Klement on Investing.

Your performance tends to improve if you stop comparing it to other investors or some arbitrary benchmark.  If you focus only on your investment process and what you can control, you are less stressed about your investments and give them more time to create long-term performance.  You are less likely to sell assets that may go through a temporary drawdown, and you feel less pressure to just invests in what has worked most recently.

“These 4 pillars are the ‘SOUL’ of organic growth,” Joe Duran, Citywire RIA.  A simple framework for the next generation of advisory firm leaders.

“Carried Interest: Assessing Current and New Methodologies on Valuation,” Johnson Associates.

By understanding the current value of carry awards, firms will be able to more accurately determine all-in economics across traditional compensation and carried interest.

“Can Machines Time Markets?” AQR.  Thoughts on whether “small, simple models — not complex machine learning models — are best suited for market timing applications,” or whether “astronomical parameterization” offers new possibilities.

“Common Investor Relations Representation,” David Volant, SSRN.

I find common IR representation increases common institutional investor ownership, overlap in sell-side analyst coverage, and similarities in guidance practices across clients — even among economically dissimilar firms that operate in different industries.

“IFRS Accounting Standard Will Support Better Investment Decisions,” Nick Anderson, Enterprising Investor.  Companies subject to IFRS will be rolling out changes to their financial statements over the next three years.

Success

“If your work is unfulfilling, the money will be too.” — Jerry Seinfeld, via Ben Carlson.

Flashback: A tsunami of change

The brokerage industry underwent a time of significant change in the late 1990s.  Once upon a time there were mid-sized firms who were very influential with asset managers and instrumental in bringing firms public.  Most of the notable ones were gobbled up by banking firms in a relatively short period, including these which agreed to be acquired in 1997 alone:  Alex. Brown (by Bankers Trust); Robertson Stephens (BankAmerica); Montgomery Securities (NationsBank); Wheat First (First Union); and Piper Jaffray (U.S. Bancorp).

Within a couple of years, the dot-com boom had turned into a bust and the banks were cutting back on those research operations (and in some cases being bought themselves).

In 1999, Goldman Sachs said goodbye to 130 years as a partnership and became a public company.  An article by Joshua Franklin details some of the twists and turns in its quarter century, including the switch from a brokerage firm to a bank holding company during the financial crisis.

Postings

The archives include all of the previous editions of the Fortnightly, as well as essays on important ideas from different pockets of the investment ecosystem.  Here’s an example of an posting from December, “Identifying Unrealistic Expectations in Manager Selection.”

Thank you for reading.  Many happy total returns.