Happy New Year!
The Fortnightly is delivered to all subscribers, paid and free, and includes a range of readings and ideas for everyone. (Check out the subscription options here.)
Activists
According to a column by Jonathan Guthrie in the Financial Times, the “stakes” of activists aren’t always what they seem:
Their real exposure to gains and losses may be far lower than that of the so-called long funds that invest for pension schemes and insurers. Management and media can therefore overestimate activists’ real financial commitment — and thus the alignment of their interests with other investors.
Guthrie provides some examples where the advertised holdings of activists are misleading, but he doesn’t argue for regulatory action. Instead he concludes:
A simpler corrective would be for chief executives and long funds to be more sceptical. They should challenge activists and other sophisticated investors to state their detailed exposure to a target company with a sign-off from an investment bank. If the wheeler-dealers declined, it would be reasonable to wonder why. And we should stop throwing that silly word “stake” around.
TPG, IRR, MoM
The lede to an Institutional Investor article:
Private equity giant TPG is taking advantage of booming markets to go public next week, but critics say it is inflating the returns of its funds — and burying the bad news — in its S-1 registration statement for the IPO.
The story cites a letter by Eileen Appelbaum and Jeff Hooke to the SEC, which delves into the murky world of private equity performance reporting — and points out what they see as shortcomings and inconsistencies in the filing. It will be worth watching to see whether TPG alters the filing in any way as a result, especially given Gary Gensler’s wonderings in a November speech:
I wonder whether fund investors have enough transparency with respect to these fees. I wonder whether limited partners have the consistent, comparable information they need to make informed investment decisions.
Meetings
For a minute there, it looked as though more “knowledge workers” would be going back into the office, but for most that move has been delayed, and even rescinded for some of those who had made the transition. (What comes next in the world of work for investment professionals will be the focus of an upcoming series on this site.)
As tough as Zoom sessions can be, they are just another permutation of the meeting culture. Tyler Cowen offers his thoughts on why some (many? most?) meetings are bad. The first four points include the word “boring” and explain different factors that cause the boredom that grates on attendees.
Also, “Many meetings lack a natural close, due to insufficiently strong leadership . . . [and] do not price the scarce resource of time.”
Other
“Elizabeth Holmes and her Big 4 audit firm buddies at Theranos,” Francine McKenna, The Dig. An important angle of the story.
“Bill Foley,” Exploring Context. “How Bill Foley built several multi-billion dollar businesses and generated one of the best long-term investing track records.”
“Global Private Equity Barometer,” Coller Capital. A good set of questions to gauge what others are thinking and doing — and ask yourself what you are thinking and doing.
“An Engineer’s Hype-Free Observations on Web3 (and its Possibilities),” Dave Peck, PSL. “Fair warning: this is a long analysis of the current state of the ecosystem. It is a collection of opinions from a pragmatic builder’s perspective. It is focused away from economics and the financial mechanisms of the chains themselves.”
“Knight Diversity of Asset Managers Research Series: Industry,” Knight Foundation. The foundation’s latest piece illustrates the trends in diversity at hedge fund, mutual fund, private equity, and real estate asset managers.
“21 thoughts from 2021 I’d like to take into 2022,” Tim Urban. The opening graphic was used in a previous Fortnightly. There are many more ideas to ponder in this compilation thread.
“52 Things I Learned in 2021,” Jason Kottke. An interesting list.
Always something
“As for fads — there’ll be new ones every year. We never run out of inventory.” — Brutus, Confessions of a Stockbroker (1971).
2021 Quiz
Thanks to those who tried out the quiz that was highlighted in the last edition of the Fortnightly. It turned out that it was pretty hard, with a maximum score of only 76% and an average showing of around half of that. Here’s one of the questions:
Elon Musk was named Time’s Person of the Year for 2021. Which of these business people did not receive a similar honor in years past?
Mark Zuckerberg
Ted Turner
Steve Jobs
Andy Grove
That had the worst percentage of right answers of any question. Grove was picked by 48%, while Turner and Jobs tied for the lowest choice at 15%. The correct answer is Jobs.
A bad combination
The top panel of the chart shows the duration since the end of 1990 for two key Bloomberg U.S. bond indexes: the Aggregate (which is the most widely used as a benchmark) and the Treasury (which represents the kind of “pure” fixed income that does well during times of stress). On the bottom is the yield on those same two indexes.
The chart illustrates a key feature of so-called bond math — all else equal, as rates go down duration rises. That bad combination of higher volatility and lower yield hasn’t been much of a worry over this time period, but the bounce in inflation has investors worried.
There’s a major debate about how stocks will do if rates keep rising, but many believe that TINA is the operative principle — that when it comes to stocks, “There Is No Alternative.” (A recent Morningstar piece takes that tack: “Lower your expectations, but with bonds likely to struggle, the ‘TINA’ market for stocks continues.”)
Unfortunately, as long-duration assets, stocks also face a bad combination. The earnings yield doesn’t provide a lot of cushion and high valuations can translate into greater volatility. It’s a more complex calculus than the simple math of bonds, but there is a broader range of outcomes (including bad ones) for equity holders in a higher interest rate environment.
Postings
The slow holiday season wrapped up with a free reposting of “Ten Charts and Some Questions” and a subscriber-only essay on “Identifying Quality Across the Investment Chain.” The complete archives can be found here.
Published: January 9, 2022
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