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He ended his note with this: “Thanks again for always shaking my intellectual tree!”
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“Everyone was shocked”
That’s the start of an Institutional Investor headline last week; the rest of it: “Investment Committee Members Resign After Hartford HealthCare Fires Staff, Hires Morgan Stanley.” The article quotes a statement from HHC that says of those who were banished, “The investment team’s acumen has earned national recognition from investment industry experts.” Hmmm.
Why the switch then? The spokesperson talked up Morgan Stanley’s “deep bench” of “research analysts, market strategists, and investment managers” and access to a “dedicated team” with “a full suite of investment management, fiduciary oversight, and operational services.”
No matter the quality of the firm, a “dedicated team” within an OCIO is different from a “dedicated team” that’s in house. Those thinking through the trade-offs should obviously include the investment committee, other knowledgeable parties, and perhaps an outside consultant. But the committee wasn’t even consulted, which means that the decision process was narrow by design, immediately causing the motives of those involved to come under question.
You can read the resignation email from committee chair David Roth — and reactions and theories from others about what might have happened — on Leanna Orr’s LinkedIn and Twitter postings.
A new litigation front
A number of defined contribution plan sponsors have been sued for excessive fees (including several asset management firms regarding the plans for their own employees), and some for the subpar performance of active management options. Now a new litigation front seems to be opening up. Megan Pacholok of Morningstar writes:
But with most plan sponsors now focused on fees, aggressive and opportunistic law firms have found a new target: past performance. Ten companies, typically those with more than $500 million in assets in their 401(k) plans, face allegations that they violated their fiduciary duty by only focusing on selecting a low-cost option over better-performing peers. However, these allegations are made with the benefit of hindsight. The argument hinges on whether the sponsors should have swapped to a top-performing target-date series in the past without knowing whether previous performance trends would persist.
As noted in a recent posting on this site, performance tests are fraught with problems, be they enforced by regulators, litigated by the courts, or adopted willingly by practitioners.
Communication
Chenmark produced a piece titled “Communication,” with a subheading that defined it as “the difference between management and leadership.” It offers some “lessons learned along the way” that fill the gap between analysis and execution.
It links to a Yale case study, “On the Nature of CEO Communication Patterns in a Small Business.” (One of the founders of Chenmark is a co-author.) Don’t let the “small business” description keep you from reading it; the advice is universal.
Flashback: The velocity of learning
In 1999, Jason Zweig authored a piece, “The Velocity of Learning and the Future of Active Management,” for Peter Bernstein’s newsletter; it is available on Zweig’s site. The points he made still apply today — only more so.
To wit, “in money management, the cumulative advance of knowledge does not simplify the lives of those who come later. It makes their jobs harder.” While gargantuan businesses dominate the industry — especially for beta and quasi-beta strategies — increased scale is a quick way to lose an edge: “Beyond a certain rate, asset growth is indistinguishable from suicide.”
Zweig saw investors continuing to expect outperformance from managers, even as they tightened up their tracking error and style box expectations, presenting “a killing paradox”:
If he wants to excel, a manager must ignore tracking error and shatter the stylistic chains the middlemen want to shackle him in. But if he scoffs at tracking error in his quest for higher long-term returns, then he runs a much greater risk, at least in the short term, of underperforming somebody’s benchmark.
These factors continue to define the business and inhibit the quest for the bits of fleeting alpha that remain.
Other reads
“Author Talks: Gillian Tett on looking at the world like an anthropologist,” McKinsey. On why anthropology is great training for someone trying to understand market inhabitants:
[It’s] incredibly helpful for looking at bankers for several reasons. First, because financiers make the mistake of thinking that finance is all about money. And your algorithm and model can explain everything. The reality is that how money moves, what goes wrong with money, is also driven by all the social and cultural patterns that shape financiers who are operating as institutions.
“Defensive Equity and Market Downturns: Is This Time Different?” bfinance. Things being what they are, people are looking for defensive stocks; this surveys and compares five basic types.
“In a Sign of the Times, VC Is Bragging About Being Slow and Thorough,” Hannah Zhang, Institutional Investor. Should due diligence standards be thought of as changing with the times or as being immutable?
“It’s now a badge of honor to go slow in the diligence process,” Walne [of Manhattan Venture Partners] told II in an interview. “The traditional method of deploying capital quickly and spray and pray . . . is completely gone.”
“Crowd Control for Fund Managers,” Anil Rao, et. al, MSCI. Crowded stocks have done poorly over time; three strategies for adjusting a fund’s level of crowding.
“The 40 year-old hedge fund managers who feel old and decrepit,” Sarah Butcher, eFinancialCareers.
Instead of a group of high earners at the top of their games, Riach found a cohort of people hyper-conscious of their own mortality, who felt superannuated by the younger people coming up behind them.
“Selling Private Equity Fees,” Minmo Gahng and Blake Jackson, SSRN. “Our results suggest that the reduced ‘skin-in-the-game’ from stake sales does not exacerbate agency frictions between sellers and their fund investors.”
“Masters of the Universe, Fortune Tellers, and Fate,” Charles Skorina. Joe Dowling shares the qualities that make for a great (asset owner) investor:
They have the ability to step away from the crowd, they see patterns, they have intellectual curiosity, they are relentless networkers, they are dynamic and social, they have humility, and they can handle the politics.
“If you read this on a smartphone, you’re probably not going to understand it,” Joachim Klement.
Reading texts on a smartphone requires more concentration and is harder for your brain because the text comes along with more distracting features like the blue light emitted by the smartphone.
“Public Pensions Contend with Falling Markets and Rising Inflation,” Jean-Pierre Aubry, Center for Retirement Research at Boston College. Only a third of major public plans provide CPI-linked COLAs, and most of them aren’t fully indexed; today’s conditions are tough on plans and beneficiaries alike.
“John Train, Paris Review Co-Founder and Cold War Operative, Dies at 94,” Alex Traub, New York Times. Known for his investment books (especially The Money Masters), he was a Renaissance man:
His career, ranging from literature to finance to war, and from France to Afghanistan, seemed to cover every interest and issue of his exalted social class.
“A podcast curriculum for the aspiring buy-sider,” Brett Caughran (@FundamentEdge). A great collection.
Postings
“Revisiting Beliefs about Private Equity,” first published in May, was brought in front of the paywall as a Sampler posting, open to all. Much has changed about private equity; should the beliefs of the past still apply?
The summary for “Cliques and Claques in the Ecosystem”:
While not often taught to investment professionals, the disciplines of sociology and anthropology are essential to understanding both asset pricing and how organizations operate.
On a related note, “It’s The Political Season (Always)” surveys some research about politics and investing. How does tribal thinking invade and distort the investment process?
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: September 26, 2022
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