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The evil empire
In the two weeks since the last edition of the Fortnightly, the world has been turned upside down. The economic framework that was in place since the Cold War has been ripped apart by countries and companies in response to Russia’s invasion of the Ukraine. The long-term repercussions on investment markets remain to be seen, including whether investing with bad guys will become less popular overall.
For now, we can mourn the end of an era when we believed that the Russians would play nice to be a part of the economic world order. And we can marvel at the spirit of the Ukrainian people who are standing up to an oppressive power.
Culture
The Thinking Ahead Institute has issued a white paper, “Culture — the organisational superpower.” Specifically, it looks at asset owners, but also addresses asset manager organizations.
The governance structure is a key determinant of culture:
Asset owner boards can have a wide variety of representation and a mix of capabilities, but generally the lay characteristics combine a focus on the member with domain knowledge that is uneven. This results in most boards having a culture with high levels of integrity but with certain cautiousness and conservatism. The generalisation is that there are typically low levels of innovation and risk tolerance, which is often mirrored in the asset owner executive team they oversee.
Another impediment is the lack of innovation in the industry:
While cultural norms differ across segments of the industry, it is apparent from our research that true innovation in the investment industry is rare.
Investment organisations find it hard to apply innovation to the business and operating models, in contrast to applying it within portfolios.
Among the sections of the paper is one on “superteams,” which includes tips “to build exceptional performance” and to improve meetings, as well as “ten tough questions” for superteams to pose.
Adversarial collaboration
Daniel Kahneman’s Edge lecture on “adversarial collaboration” is available in written, video, and audio forms. While focused on academic resource and discourse, much of it is applicable to investment debate and decision making.
He says, “To a good first approximation, people simply don’t change their minds about anything that matters.” Belief is social; we have our tribes and our reasons come from our beliefs:
The power of reasons is an illusion. The belief will not change when the reasons are defeated. The causality is reversed. People believe the reasons because they believe in the conclusion.
Kahneman explains why he came to favor adversarial collaboration rather than what he calls “angry science.” His work with Gary Klein on intuition — a topic of much interest in investment circles — resulted in the paper “A Failure to Disagree,” even though they approached the question from opposite points of view. (They concluded that investment markets are an environment in which intuition is unlikely to be successful on a regular basis.)
Best of times, worst of times
Joe Wiggins wrote a posting for Behavioural Investment called, “There Has Never Been a Better or Worse Time to Be an Investor.”
He listed five areas where “investors now seem unequivocally better off”: cost, control, transparency, choice, and information. But then he said that if you “consider the same categories through a behavioural lens, a different picture emerges.”
For example, we have the ability to see what is happening in a portfolio “whenever and wherever we wish,” but that transparency often leads to worse choices rather than better ones.
Resources
Commonfund has a new portal for fiduciary education called Commonfund Institute Online. According to the press release, the ten on-demand courses currently available offer downloadable slide decks, course-specific reading materials, and instructor-led videos and webinars. There will also be live courses.
Top1000funds.com has introduced the Asset Owner Directory. Each of the largest asset owners has a page (here’s Japan’s GPIF) which provides information on it, links to its websites and annual reports, and a complete archive of stories that have been published about it on the site.
Other reads
“First Principles: The Building Blocks of True Knowledge,” Farnam Street. “Reasoning by first principles removes the impurity of assumptions and conventions.”
“The Agency of Greenwashing,” Gianfranco Gianfrate, EDHEC-Risk Institute.
Firms make incomplete, misleading or false environmental claims with the aim of avoiding loss of legitimacy or reputational damages, thus increasing information asymmetries between themselves and their stakeholders. This study has three main objectives. First, it proposes a new metric for greenwashing. Second, it explores how corporate governance characteristics affect greenwashing. Third, it investigates the relationship between greenwashing and firm value.
“Due Diligence — Get On The Ground,” Ian Cassel, MicroCapClub. Read everything, utilize your network, talk to people on the ground (but not just one), and get on the ground yourself.
“Abu Dhabi wealth fund bets on scientific approach using quant experts,” Andrew England, Financial Times.
The fund, which is estimated to manage about $700bn, has over the past two years been building a “research and development lab and factory” in the hope that a scientific approach will make it more nimble and better able to identify and take advantage of market anomalies.
“Retirement Plan Landscape Report,” Morningstar. “The Apparent Stability of the U.S. Retirement System Masks Its True Deep Fragility,” among other sections.
“Vanguard finds robos are no threat to advisors,” Paulo Costa and Jane Henshaw, Vanguard.
Breaking down advice into discrete components, we found that investors prefer that parts of portfolio management and functional tasks be automated and that human advisors excel at delivering emotional outcomes. Overall, our results provide evidence that human advisors should leverage technology to scale their business while strengthening their uniquely human value proposition to address investors’ emotional needs.
“Deep Waves: The Quiet Undertow of Intangible Assets,” Kim Catechis and Lukasz Labedzki, Franklin Templeton. “At this point, 90% of the capitalization of the S&P 500 Index is accounted for by intangibles, a huge jump from 36% in 1985.”
“Death of an asset management salesman,” Chris Delahunt, Citywire. “Unquestionably, sales has — almost always — held the whip hand within asset management firms.”
“Eponymous Laws Part I: Laws of the Internet,” Secretum Secretorum. Including Danth’s Law: “If you have to insist that you’ve won an internet argument, you’ve probably lost badly.”
Inspiration
“Whatever inspiration is, it’s born from a continuous ‘I don’t know.’ ”
— Wisława Szymborska
The BRICs
Jim O’Neill of Goldman Sachs came up with the acronym BRIC in 2001 to summarize the power of the emerging economic of Brazil, Russia, India, and China. It became one of those concepts that catches fire among investors.
In 2005, MSCI created the BRIC Index, with backtested data from the beginning of 2001. It was onward and upward both in absolute terms (top panel) and versus two mainstay indexes (at bottom), right up to the vertical line. That marks the debut of the iShares MSCI BRIC ETF (BKF), which tracks the index. It has been downhill relative to those indexes ever since.
Russia was about 7% of the index at the end of 2021. Who knows what it should be today. Maybe zero.
Postings
Two recent pieces:
“The Star Analyst Years.” The first in an occasional series on the huge changes in the investment business during the 1990s and 2000s looks at the upheaval in investment research and the people at the center of it.
“Decisions with Other People’s Money.” What factors can lead the risk-taking of portfolio managers to be out of sync — or in conflict — with that expected by their clients?
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Published: March 7, 2022
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