Thanks to those of you who completed the survey on private asset performance reporting. While there were some definite trends in the responses, they were too few in number to publish. The survey will be left open; please complete it if you haven’t and send along to others.
Goldilocks or the bear
An InvestmentNews article by Ryan Neal (“Alts are rockin’ the house!”) carries this subtitle: “Demand for income, inflation protection, enhanced returns and volatility dampening has created a ‘Goldilocks moment’ for alternative investments” (at investment advisory firms). For some that means private assets and for others “liquid alternatives,” but two-thirds of those surveyed by Cerulli indicated “dampening volatility or offering downside protection as a goal.”
In contrast, a Financial Times commentary from Satyajit Das sounds a warning about private assets; its subhead: “The rush into the sector was predicated on the continuous availability of cheap capital.” He thinks that illiquidity, opaque valuations, elevated multiples, the refinancing merry-go-round, and “complicated levels of risk” argue for caution — precisely at a time when alternative investment managers are taking their wares to the masses.
Value buyers
Clusters of players in the ecosystem have different constraints and tendencies. “The Value of Value Investors,” a paper by Maureen O’Hara, et. al, provides a good example of that. It looks at the role that insurance companies play in taking advantage of — and helping to stabilize — dramatic moves in the corporate bond market. The action during the early part of the pandemic lent credence to that conclusion:
We learned once more that dealers are to be understood primarily as buyers of “first resort,” acting to smooth short-term order flow imbalances, with neither the capital nor the inclination to stop outright market meltdowns. The buyers of “last resort” are value investors, whose long investment horizons allow them to step in and buy when illiquidity and temporary price dislocations present investment opportunities. Insurance companies fit this characterization: Typically, their stable funding structures give them the ability to step in and profit from transitory market fluctuations. During times of heavy selling pressure, this ability makes them particularly valuable counterparties for dealers, and for the bond market in general.
The authors reference another paper, from Sirio Aramonte and Nicola Mano, “Insurance companies as liquidity providers: The case of corporate-bond mutual funds,” which agrees that, as a result, insurers “earn positive returns on bonds sold by mutual funds.”
A hitchhiker’s guide
Joachim Klement produced a five-part series entitled “The Hitchhiker’s Guide to Investment Research.” The first piece, called “Busy Fools,” calls out a lot of the work of investment professionals:
I think most economists and strategists working at banks and asset managers preoccupy themselves with the wrong things and thus waste a lot of time producing research and forecasts that are useless for investors.
The second installment is on theory versus practice, which reminds us that “there are no immutable laws in economics and finance.” In the third, career risk clashes with the long run — and the author says, “don’t ever try to match the data to the model.”
In the fourth, Klement contrasts the scientific method — “Science looks for contradictions and falsifications” — with investment practice (which often tries to twist observations to fit accepted wisdom), writing, “If your investments are not working, use them to better understand why they are not working, and don’t be afraid to throw established wisdom out the window.” And, finally, it’s often true that simple is better.
Public speaking
Ted Gioia is a music historian and performer who writes the newsletter The Honest Broker. A recent piece, “My 10 Rules for Public Speaking,” offers some great ideas for those who want to put themselves out in front of audiences — or for those who already do.
His ideas are different than those found elsewhere, and a few of them might seem a bit too far out there for you. But that’s the point. In a realm where there is a boring sameness to presentations, the speakers that make an impression are usually the ones who are willing to take some risks and not follow convention.
Other reads
“Impact Investing Handbook: An Implementation Guide for Practitioners,” Rockefeller Philanthropy Advisors. The what, who, why, how, so what, and “now what” of impact investing — plus a large number of case studies.
“Colorado regulators explain controversial guidance for non-AUM-based RIAs,” Sam Bojarski, Citywire RIA. The movement to new compensation models has led to a variety of state regulations, some of them challenged by Michael Kitces and others.
“Exposing a fee model to heightened scrutiny because it fails to conform to a historical pricing practice designed for wealthy investors, is unreasonable,” Kitces wrote in his letter.
“How Much Should GPs Write Down Their Portfolio Company Valuations?” Castle Hall. Some “basic valuation control issues” for operational due diligence (and a reminder that increased investments in privates by mutual funds can lead to greater scrutiny of the pricing decisions of others when those holdings are marked down).
“What Do Investors Believe They Can Do But Can’t?” Joe Wiggins, Behavioural Investment.
It is often said that a useful measure of happiness is the gap between reality and expectations. A similar approach can be adopted for identifying poor investment decisions. They tend to occur when our expectations of what we are capable of exceed the reality. This miscalibration leads us into activities and behaviours that we really should avoid.
“A History of Family Offices,” Frederik Gieschen, Compound. From Rockefeller to Gates — and the multiplication of family offices starting in the 1980s.
“What to Say to Your LPs Right Now,” John-Austin Saviano, High Country Advisors.
Also, don’t forget that LPs talk to each other. A lot. Extraordinary manager letters and analysis tend to find their way around the community and can raise the profile of a firm.
“Burnout,” Guan Jie Fung and Cedric Chin, Commoncog. While not specific to the investment world, this guide looks at the markers of burnout and how to deal with it.
“Multifactor Funds: An Early (Bearish) Assessment,” Javier Estrada, SSRN.
Although their track record is limited, the current evidence on multifactor funds targeting the U.S., global, international, and emerging markets shows that these products have largely failed to outperform market-wide, cap-weighted indexes, or low-cost ETFs that track them, in terms of return, risk-adjusted return, and downside protection.
“The Art of Smart Brevity — Write Less, Say More,” Jim VandeHei, TED. The communication philosophy behind Axios, founded in 2017 and sold last week for $525 million.
“Wise Words from Charley Ellis,” Novel Investor. Timeless.
Which group are you in?
“Poor communicators ramble. Good communicators leave out unnecessary details. Great communicators treat words as the scarcest commodity.” — Morgan Housel.
Private credit
“Is Private Credit a Bubble, or Just a Little Frothy?” That’s the question posed in an Institutional Investor article by Christopher Schelling, who reviews the current state of an asset class that “has exploded in popularity over the last two decades.” His conclusion is that “private credit is still positioned to be a solid source of income and excess return for investors with some liquidity to spare.”
The chart shows the Cliffwater Direct Lending Index since inception. It is only published once a quarter and the June 30 update is not available yet; the Bloomberg US High Yield Index is priced daily.
Postings
Here are the most recent postings for paid subscribers (you could be one too if you aren’t already).
“Reviewing the Asness Peeves.” Reflections on a popular 2014 article by Clifford Asness that laid out his top-ten investment peeves at the time, including using the wrong time frame to evaluate “strategies, asset classes, managers, and potential risk events”:
Despite the fact that “you don’t want to be a momentum investor at a value time horizon,” that decision window remains the industry standard and is often codified in investment policy statements and manager selection procedures — an outstanding example of a practice that lingers despite evidence against it.
“Campbell Harvey on Quantitative Investment Strategies (and More).” Insight from a wide-ranging interview with another notable contributor to investment knowledge:
He thinks that the standards that have led to the so-called “factor zoo” need to be rethought: “If 400+ factors can clear this hurdle, we need a higher hurdle.”
“Foundational Elements for Asset Owners.” This “Four for Friday” posting touched on the path of simplicity in institutional investing, communication, expected returns, and new models of aggregation.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: August 15, 2022
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