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Bogle’s legacy
Portfolio Manager Research has made available the Spring 2022 issue of the Journal of Beta Investment Strategies, which is dedicated to Jack Bogle, the Vanguard founder who has been called the man who “may have saved ordinary Americans more money than any man in history.”
Several investment luminaries authored pieces for the issue, which also includes articles on the evolution of indexing and current topics of interest.
Ironically, as he was being celebrated in that journal, Bloomberg published a piece with the title, “Vanguard Stumbles In Pivot From Cult of Jack Bogle.” The subheading put a finer point on it: “For diehard fans of the company’s founder, what’s at stake is the very soul of the $8 trillion mutual-fund giant.”
Success has bred competition. And the need for growth (or perceived need for growth) has taken the organization into areas that seem distinctly non-Bogle, while technology and service issues have frustrated the long-time faithful.
Bogle’s personal legacy isn’t at risk, but (despite the money pouring in) Vanguard seems like it is trying to figure out what it wants to be. That used to be clear.
Communication
A couple of notable reports were released that emphasized the importance of communication for investment professionals.
The Financial Planning Association released a comprehensive study, “Developing and Maintaining Client Trust and Commitment in a Rapidly Changing Environment.” Unfortunately, it is presented in seven separate reports; for ease of use, it would have been beneficial to have it all in one document.
The “summary and recommendations” chapter is worth a look-through, if only to demonstrate the size of the gaps between how planners assess their communication skills on various dimensions versus how clients do so. For example, take the statement, “Planner communicates recommendations in terms clients can understand.” The percent who “somewhat agreed” to “strongly agreed” with that? Planners, 84%; clients, 51%. (Other attributes showed even larger differences.)
Michael Mauboussin and Dan Callahan have written another good essay, “Feedback: Information as a Basis for Improvement.” Stay tuned for a more in-depth review of the piece to be published in the next couple of weeks. For now, here is one of the comments within it regarding communication:
Effective communication skills are also an important aspect of investment analysis and can be improved via training.
Every investment role can be summed up in this way: analysis plus communication. The lack of emphasis on the latter is a major failing in the investment industry.
The pendulum
Howard Marks’ recent memo starts by saying he’s “strongly interested in — you might say obsessed with — the concept of the pendulum.” In this case, he is applying that obsession to international affairs. At first, regarding the downside of the economic entangling of European countries and Russia:
Security doesn’t seem to have received much consideration in the deliberations that led to Germany’s energy dependency on Russia.
The other topic of the memo is outsourcing. The pendulum has swung very far in that regard (and for very long), but the weakness in global supply chains is now evident.
Both of these issues “are marked by inadequate supply of an essential good demanded by countries or companies that permitted themselves to become reliant on others.”
Speaking of pendulums, a Packy McCormick posting includes a section on the spectacular track record of the Medallion Fund run by Renaissance Technologies. “So how does RenTech do it?” McCormick cites this quote from Kresimir Penavic of Renaissance:
What you’re really modeling is human behavior . . . Humans are most predictable in times of high stress — they act instinctively and panic. Our entire premise was that human actors will react the way humans did in the past . . . we learned to take advantage.
A due diligence question
Activist investor Trian Fund Management has been agitating for change at Janus Henderson. Now a new CEO has been named, which apparently led to the chief investment officer leaving too. If you’re one of the many clients of the firm around the world, does any of that alter how you think about the prospective returns you will get as a client (not as an investor in Janus Henderson’s stock) over the next decade? In what ways?
Other reads
“The 10X10 Report,” Russell Investments. This consists of a series of three reports that pair the opinions of “10 of the world’s leading institutional investors,” with those of “10 of the world’s leading asset managers” on different topics.
“Venture capitalists pass on board seats to secure deals in hot crypto start ups,” Miles Kruppa, Financial Times. The CEO said that Paradigm, which led the round of funding, did not require a board seat: “There was a deep level of trust between the two teams. There was a lot of spiritual alignment in what we wanted to do.”
“How will you reframe the future of advice if today’s client is changing?” Jan Bellens, et. al, EY. “Experience shows that ingrained organizational habits can represent the greatest barrier to achieving genuine transformation in the wealth industry.”
“The Ends vs. the Means: Both Matter,” T.J. Kistner and Reed Burns, Segal Marco Advisors. This includes some simple visuals that reinforce the point that thinking of an asset manager as “first quartile” (or “bottom quartile,” for that matter) leads to unrealistic expectations.
“Debiasing and Alpha,” Drew Dickson, Albert Bridge Capital. “So, in our evaluation of value-added and team contribution, if someone isn’t shooting their free throws underhanded, or striking out often enough, they aren’t following the process. They aren’t engaged with our philosophy.”
“Big Stock Sales Are Supposed to Be Secret. The Numbers Indicate They Aren’t,” Liz Hoffman, et. al, Wall Street Journal. All of the sudden, block trading is getting a lot of attention. Will this turn into a big scandal?
“Purchase Price Allocations for Asset and Wealth Manager Transactions,” Zachary Milam, Mercer Capital. What are the accounting issues involved in all of these RIA combinations (especially for the publicly-traded acquirers)?
“Providence Pension Mulls Issuing $515 Million in Bonds, Following POB Trend,” Anna Gordon, Chief Investment Officer. Reminder: “Borrowing money to invest it in the stock market is not actually an arbitrage opportunity.”
“March 2022 Active Management Environment,” Verus. The consultant’s visualizations provide a quick look at different strategy universes in return-vs-standard-deviation space.
“Ned Johnson (1930-2022),” Jason Zweig, Wall Street Journal. The title section of this newsletter is “How Should Kids Learn to Invest?” (which is worth reading), but further down is a wonderful remembrance of the Fidelity leader, including, “I first met Ned Johnson when I was nine years old.”
Creativity isn’t sanctioned
“Orville Wright did not have a pilot’s license.” — Gordon MacKenzie, in Orbiting the Giant Hairball.
Breaking even
There is a regime-shift feeling in the air. It wasn’t that long ago that central bankers were begging for inflation. It seems that they got their wish and now don’t know what to do.
The market’s inflation predictions are shown in the chart, derived from the relationship between regular Treasury notes and inflation-protected ones. The dashed lines show the previous highs in expectations, going back to the start of 2007.
The ten-year breakeven hasn’t moved as much, as you would expect. Where that goes from here will have a lot to say about what kind of regime we are really in.
Postings and tweets
Two recent postings for paid subscribers:
“Questions about the Dominance of Indexed Strategies.” A profound change has taken place in many portfolios that are supposed to produce alpha, from a focus on finding the best individual holdings to an environment in which many are “agnostic to security-level information.”
“Steppingstones and Clues for Further Research.” A Morningstar analyst’s downgrade of Fidelity Contrafund provides an opportunity to see the value of visualizations in determining good avenues for due diligence research.
“The Star Analyst Years” is out from behind the paywall and open to all. “OCIOs: History and Evaluation” is now available on LinkedIn.
Also, follow us on Twitter. Among the recent Chart of the Day entries there are the two-pronged pain in fixed income, divergent performance in emerging market regions, the ARKK and non-profitable technology braid, and four starkly different oil futures curves occurring in less than two years.
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Published: April 4, 2022
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