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Defined contribution plans
From a January 24 Bloomberg Law article:
The U.S. Supreme Court revived a lawsuit against Northwestern University Monday in a decision that may breathe new life into dozens of lawsuits across the country that take aim at retirement plans with poorly performing investments and excessive recordkeeping fees.
It reports that there have been “about 150 lawsuits filed in federal court over the past two years” regarding the role of fiduciaries in selecting options within defined contribution plans. An earlier article stated, “A sharp spike in lawsuits over retirement plan fees has wreaked havoc on the market for fiduciary liability insurance.”
The ruling has plan sponsors and lawyers trying to grasp its implications, and no doubt those firms who provide independent evaluations of plan investment choices are inundated with business.
One law firm, Bradley, summarized the Court’s (unanimous, with one recusal) opinion in this way:
So there are two guardrails to steer between. On the one side, fiduciaries cannot select a menu of higher and lower-cost investment options and forget to evaluate them, regularly and individually. On the other side, fiduciaries have a range of reasonable choices they can make using a prudent process. The width of the space between is difficult to gauge.
Of great interest is how this will be interpreted by lower courts in regard to performance evaluations of investment options that don’t have higher-than-normal fees. If investments on a sponsor’s menu that underperform for a few years are deemed to be evidence of fiduciary failure, that will be a sign that things have gone too far.
The elusive edge
Charlie Henneman and Preston McSwain had a wide-ranging interview with Richard Ennis. Among the many topics covered (the title of the posting is “Does the Endowment Model Measure Up?”) was manager research. Ennis:
At EnnisKnupp, we had about 30 people in our manager research group.
I spent a lot of time and resources trying to figure out how to identify superior investment managers — ones that had an edge.
I would constantly ask managers what they believe their edge or advantage over the competition was. Consistently, they would say that it was their education, technology, access to better information, process, or a combination of these.
When pushing them, though, as to how they were really different than what all the other managers were telling me, nine out of ten times they would fold.
If you’ve been reading the content of The Investment Ecosystem these first few months, this dynamic is familiar to you. Those doing due diligence need to have the tactics to get the explanatory depth that’s needed. Likewise, managers need to be able to identify true differences — not spout the same old lines — and to explain how any advertised edge will stay sharp in the face of market forces out to make it dull.
Thinking about things
David Spaulding of the Spaulding Group opens a recent newsletter with a quote from Benjamin Dreyer:
And that’s often the problem, isn’t it? In writing and in so many things: that we accept things we’re taught without thinking about them at all.
Spaulding’s expertise is performance measurement and he cites things that are accepted in that realm “perhaps without thinking of them.” He lists six rules that don’t make sense to him in the Global Investment Performance Standards (some of which he’s been advocating against for decades).
The specifics may or may not be of interest to you (although Spaulding provides easy to understand examples), but the moral is what’s important: just because something is a standard or a norm doesn’t mean it makes sense or shouldn’t change.
Other reads
“Workshop Note: Reality Tunnels,” Frederik Gieschen, Neckar’s Insecurity Analysis. “If you’re trying to connect with someone, keep in mind that you have no idea what show is playing on their chosen channel.” (Plus some other interesting topics, including culture.)
“Options Market Structure 101,” Front Month. An overview of what happens to Joe Retail’s options order.
“Last Sane Man on Wall Street,” Andrew Rice, New York. An excellent profile of Nathan Anderson of Hindenburg Research.
“Intelligo Risk Barometer 2022: Pre-Investment Risk Indicators and Insights,” Intelligo. One firm’s approach to background checks, with some interesting statistics from its evaluations.
“Succession in the Context of Nepotism,” Rosemont. “Several firms have navigated the nepotism gauntlet well, and the beneficiaries — the spouse, child, cousin, etc. — tended to have the following in common: they work as hard or harder than anyone else, are every bit as qualified as any other candidate, and bring a prove-it attitude to work every day — this isn’t the University of Entitlement.” (Also see the excellent article about Fidelity by Justin Baer of the Wall Street Journal.)
“Analyst information and investor reaction, not a match made in heaven,” Joachim Klement, Klement on Investing. “Analyst forecasts vary in accuracy and quality over the cycle, but it seems that investors pay attention to analysts at exactly the wrong time when analyst forecasts are most unreliable.”
“A Probabilistic View of Private Equity Returns – An Allocators Perspective,” Chris Keller, Portfolio for the Future. “Let me cut to the chase, 2x is not a high probability outcome when investing in private equity.”
“Observations from Examinations of Private Fund Advisers,” Securities and Exchange Commission. An update of a previous SEC risk alert, this one detailing additional compliance issues it has found in examinations: “(A) failure to act consistently with disclosures; (B) use of misleading disclosures regarding performance and marketing; (C) due diligence failures relating to investments or service providers; and (D) use of potentially misleading ‘hedge clauses.’ ”
“The moral calculations of a billionaire,” Eli Saslow, Washington Post. At 78, Leon Cooperman is at his desk for more hours every day than most everyone else; much earlier in life “he’d come to see the act of making money less as a personal necessity than as a serious game he could play and win.” Fascinating.
The plant manager
“The toughest job in PPG right now is a plant manager. They wake up in the morning, check their phone to see how many people call off sick, then they get to work. They go through the dock area to see how many trucks didn’t get picked up, and then they go to the receiving area and then find out what didn’t come in that was supposed to. And then they move it into the plant and the supply chain people are telling me that they’re going to have to make smaller batches, because of lack of raw materials.” — From the PPG Industries earnings call, highlighted by John Authers of Bloomberg.
A divergence of opinions
In the posting referenced in the section below, Aswath Damodaran talks about why he tackles valuations on IPOs and companies where there are wide differences in opinions. Tesla is a stark example; here are the current high, median, average, and low target prices today, according to Bloomberg. Place your bets.
Postings
Two recent postings:
“Addressing the Culture Gap.” Observations from a book about culture and what makes for team success — and from an asset manager’s point of view.
“The Teacher.” Advice from Damodaran on what it takes to value companies, along with his reasons for bucking some of the investment industry trends of the day.
All of the content of The Investment Ecosystem is available in the archives.
Published: February 6, 2022
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