There is much to chew on in this edition, but if you don’t get to anything else, please weigh in on the first item via a short survey.
Reporting private asset performance
On July 20, CalPERS reported its preliminary returns for the fiscal year ending June 30. The press release received attention because of the huge difference in returns between private equity and public equity cited within it. (See Meb Faber’s tweet, for example.)
The report provides no context regarding the lagged reporting of results in private asset classes; in fact, it flatly states that “private market investments fared much better” than public ones during the year, implying that the gap was solely attributable to the outperformance of PE.
Rather than dive into the issues now, please fill out this survey. It focuses on a couple of very important and little discussed practices –and it will only take you two minutes! Results will be reported in the next Fortnightly and on Twitter.
Timeless principles
In his latest essay, “I Beg to Differ,” Howard Marks covers a lot of familiar ground, quoting previous writings and expanding on themes that have infused his work over time. In response, Rational Reflections published a piece called “The Value of Repetition,” which argues that “timeless principles” like those Marks espouses are worthy of “consistent reinforcement.”
That echoes Jason Zweig’s assessment of his role as a financial columnist:
My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.
That’s because good advice rarely changes, while markets change constantly.
As always, the Marks essay is worth reading, regardless of the repetition. Of special note is the section on David Swensen, who wrote:
Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.
Institutional mandates
FCLTGlobal has released the latest iteration of its report “Institutional Investment Mandates: Anchors for Long-Term Performance.” It attempts to deal with “a classic time-horizon mismatch”:
The asset owner has a specific set of investment objectives that correspond to its stakeholders, liabilities, responsibilities, return goals, and risk tolerance. The manager, in turn, has a different set of stakeholders. As a result, the goals and internal incentives facing its portfolio managers and business leaders are likely to differ substantially from those of the asset owners whose capital it manages.
Best practices for ten aspects of institutional mandates are explored throughout. In addition, there is a “mandates toolkit” to aid implementation and some “exploratory provisions” that offer good questions that consider “additional ways to promote long-term thinking.”
Active management in 401(k) plans
During the early decades of 401(k) plans, passive investment options were rather rare. That is no longer the case (in most plans) and in some quarters there is even a debate about whether actively managed strategies should be included as options by fiduciaries given their spotty overall record.
In that regard, Groom Law Group has authored a report entitled “Active management plays an important role in 401(k) plans.” It details that neither ERISA (the law governing the plans) nor the Department of Labor (which oversees it) nor the courts have established a preference for passive over active approaches. The assertion in the title is stronger than in the body of the document, which says that “plan fiduciaries may conclude that active strategies can serve an important role in a 401(k) plan.”
The report can’t be found on Groom’s website, but you can access it via the Capital Group, which funded it (and designed the PDF).
Other reads
“The Russian Tank Fallacy,” Kpaxs, Three Times Wiser.
Because a neural network has no understanding of concepts as humans do, it may focus on irrelevant cues that are present in both the training and test set.
“The Story of the Decade-Long, Stop-and-Start Quest to Build a Better Fee Structure,” Alicia McElhaney, Institutional Investor. Do “fund alignment rights” represent an improved incentive framework (and will they catch on)?
“Elon Musk is hitting ‘peak hubris’ with his high-risk Twitter and bitcoin plays. Tesla shareholders should be concerned.” Lawrence Cunningham, MarketWatch.
With Musk, while most would prefer to see humble confidence come through and win out, the smart money is on a hubristic fall.
“The Bestselling Author of ‘High Conflict’ Explains What it Takes for Someone to Break With Their Political Tribe,” David Epstein, Range Widely. The dynamics involved also apply to those trying to buck entrenched investment ideas.
“SEC Staff Pulls Rug Out From Under ‘Hard Dollar’ Research Arrangements,” Amy Natterson Kroll, et. al, Morgan Lewis.
The announcement threatens to upend research arrangements between broker-dealers and investment managers (particularly global investment managers) that have been structured to comply with MiFID II.
“The complex science of integrating impact into portfolio design,” David Bell, top1000funds. “Identifying the optimal solution becomes more difficult as more dimensions are added to any problem.”
The core skill
“You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this isn’t a business where you take polls; it’s a business where you think.” — Warren Buffett, via Alex Morris.
All clear?
2022 has been a challenging year for investors. Most risk markets have rallied significantly off of their June lows.
Sides are being drawn, with some commentators calling the bottom and others warning that bear markets feature lots of rallies like this. Given the tendency of managers to chase trends (especially as year-end incentives come into view), the next few months are likely to continue the excitement to date.
Postings
The latest Sampler posting (freely available to all) is “Decisions with Other People’s Money.”
Recent pieces for paid subscribers round out the four-part series on the book Talent, by Tyler Cowen and Daniel Gross:
“Valuing Otherness in Investment Organizations.” Are there opportunities to take advantage of the biases of others in the talent selection process by better understanding issues of gender, race, and disability?
“Communicating in the Virtual World.” What are the advantages and disadvantages of remote versus in-person communication? The answers to that question are important for designing organizations (and for advancing one’s career).
“The Art of Interviewing.” The outcome of due diligence encounters depends on the quality of the questions that are asked and the conduct of the interviews. Some recommendations in that regard close out this series.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: August 1, 2022
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