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Walking the talk
FCLTGlobal has released a paper, “Walking the Talk: Valuing a Multi-Stakeholder Strategy.” The main body of it starts in this way:
The term stakeholder can be unnecessarily polarizing. This publication uses the term primarily to talk about groups that have a direct means of influencing a company (e.g., regulators, lenders and creditors, and shareholders) or play a direct role in ensuring the success of the business (e.g., customers, suppliers, and workforces). The leaders of businesses that outperform in the long term know instinctively that attention to their key constituents is central to their success.
The core argument is that a multi-stakeholder approach leads to better financial results over time — even if a shareholder-centric emphasis might do so in the short term. (The methodology for the simple exhibits that are provided is in the appendix.)
This is how it ends:
The landscape of corporate expectations is ever changing; responsible long-term companies develop processes to consistently evolve their approach to remain responsive to key stakeholders while also staying true to their corporate purpose — ultimately delivering superior value over time.
Leveraged loans
The latest edition of Verdad’s weekly newsletter is called “The Loan Engine.” It begins, “The Federal Reserve Bank of New York is out with a staff report warning of the dangers in leveraged loan funds,” noting that they have become a popular place to be of late.
But:
Our research suggests that much of this lending is, in fact, riskier than high-yield bond lending, despite being senior secured. A rule to remember in lending is that the best borrowers borrow long, fixed, and unsecured. The worst borrowers borrow short, floating rate, and secured. And in this case, the main driver of leveraged loan growth is private equity using loans to fund buyouts. Senior secured leveraged loans help private equity firms maximize the amount of leverage for the lowest cost.
Given the money that’s been gushing into private equity over the last few years, we’ll see what credit quality looks like when we have a recession that lasts longer than a quarter.
You can look at the return profile of leveraged loans in an IE chart of the day tweet from last week. Also, some overdue news: “Old-School Leveraged Loan Market Is a Step Closer to Ditching Faxes.”
Direct lending
To continue with the lending theme, Cliffwater has done a great job of summarizing the fees and expenses involved in direct lending via a clear and straightforward report, “Private Fund Fees and Expenses for Direct Lending.” It is available here, along with other good information. (Just select the “Private Debt” filter.)
Hanging out your editorial shingle
The emergence of Substack and other platforms has led to an explosion of investment content (and other content too). In a recent series of tweets, 10-K Diver offers a quick overview of the landscape. It may or may not be your ticket to stardom — that has certainly happened for others — but at a minimum putting your words “in print” is a valuable process no matter what else comes of it.
Other reads
“Remembering Michael Price, a Legendary Value Investor,” Meryl Witmer, MarketWatch. “Rely on primary sources, dig deep, and don’t use sell-side reports.”
“ESG, Impact, and Greenwashing in PE and VC,” Anikka Villegas, PitchBook. A look at three types of ESG investors: purists, pragmatists, and pluralists — and what greenwashing looks like to them. Also, two kinds of impact.
“Creating A Financial Planning Residency Program To Develop The Next Generation Of Advisors,” Carolyn McClanahan and Joey Loss, Nerd’s Eye View. Reimagining advisor education using the medical education model.
“Do Investors Understand the Long-Term? Crystallizing what it means to be a long-term investor,” Jakob Thomä, et. al, 2° Investing Initiative. This short paper offers three premises:
1) Everyone thinks that being a long-term investor is a good thing.
2) Asset managers and asset owners think they are long-term investors, but they don’t agree with each other on what that means.
3) Investors are not long-term investors according to their own definitions.
“Investor Relations 4.0: Transforming Investor Relations for the Digital Age,” DiligenceVault. An argument for moving to a next-generation IR function. (This is IR from managers to allocators, although the same principle applies from companies to managers.)
“Portfolio Construction in the Context of a Global Private Markets Platform,” Michael Taylor, Adams Street. “Active portfolio construction [using co-investments] is a powerful tool to manage risk exposure while achieving portfolio level objectives.”
“SEC takes its finger out of the dike with investigation of Big 4 auditors’ conflicts,” Francine McKenna, The Dig. “Is the regulator ready for the flood of findings, fines, and sanctions that might jeopardize the viability of more than one firm?”
“Leverage: Friend or foe?” Sarah Rundell, Top1000funds.com. Large asset owners are using leverage at the portfolio level.
“Block trading probe of Wall Street banks and hedge funds may cast large net,” Todd Ehret, Reuters. “The probe into practices surrounding such trades could be extensive and far-reaching, involving potentially hundreds of individuals and dozens of firms.”
“A Fool and His Gold,” Doomberg. The meme stock craziness just went to a whole new level.
“Inside the bubble,” Seth Godin, Seth’s Blog. “Whenever there’s a speculative bubble going on (or a cultural one, for that matter) life inside the bubble seems rational and normal.”
Unpredictable people
“The numbers we use are an abstraction of reality, not reality itself, which is full of unpredictable people.” — Mike Lipper
The 60:40 stalwart
This chart begins ten years ago, in January 2012. The total return of a 60:40 mix (rebalanced monthly) has never been below zero — and there haven’t been too many down months. The last bar is March month-to-date.
With inflation on a tear and rates rising, we’ll see if equities catch a cold, resulting in both parts of the portfolio struggling. That hasn’t happened very often during this period.
Postings
Two recent postings:
“OCIOs: History and Evaluation.” In many ways, outsourced chief investment officers are a return to the distant past. Here’s some history regarding OCIOs, comments on the current environment, and considerations for those interested in this hot industry trend.
“Two Sides of Ambivalence.” Confidence is highly prized in the investment world, even though the essence of the endeavor involves uncertainty. Perhaps there is an unappreciated superpower worth discovering.
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Published: March 21, 2022
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