Announcement
The Investment Ecosystem will be on hiatus for six weeks for some time off and some retooling. Paid subscribers will have the due dates for their next payments pushed back two months.
Have a great holiday season and start to 2023. Thanks for reading.
Sea change
Howard Marks produced one of his legendary memos, about what he sees as the third sea change in the markets during his long career. The other two happened more than forty years ago — “the advent of risk/return thinking” and the relentless decline in interest rates.
Towards the end of the essay, he included a table showing the change in fourteen market attributes during the last year. It is a framework that can be used for discussing investment beliefs and implications. If we really are facing “a complete reversal of the conditions” that have animated the investment environment for decades, then there is a need for reassessments that go well beyond the normal projections so common this time of year.
Growth and value
Acadian produced a paper on “Growth Versus Value: End of an Era?” The summary points:
Prevalent narratives trumpeting value’s resurgence in 2022 are muddled by the increasing irrelevance of mainstream value benchmarks.
Nevertheless, a nuanced examination reveals that the 2022 value revival is best interpreted as the reversal of a historically unprecedented run of speculation in growthy assets over the prior five years.
In an investing world anchored to 1, 3, 5, and 10-year track records, investors face a broad challenge in framing expectations going forward now that economic and policy conditions have shifted away from those that fostered a “one-factor bet on growth.”
The piece includes a number of interesting charts, as does GMO’s third quarter letter, which announces that “after a good run, value looks anything but exhausted.” Especially deep value.
Gaslighting
A recent edition of Bob Seawright’s The Better Letter covers “Financial Gaslighting,” specifically related to hedge fund marketing. If you’ve been around a while, this progression will be familiar to you:
Gaslighting and poor performance undergird the change in hedge fund marketing over the years. It went from “We’re going to make a ton of money,” to “We’re going to outperform,” to “We’re going to provide superior risk-adjusted returns,” to “We’re going to provide absolute returns even in down markets,” to “We’re going to provide non-correlated returns.”
ChatGPT
One of the most notable events of late has been the introduction of ChatGPT (and the attention it has drawn). More to come on that front in a few weeks. For now, here’s an article from Robin Wigglesworth of FT Alphaville on “ChatGPT vs The Sellside.” (“ChatGPT can probably already write the routine earnings preview and review as well as many sellside analysts.”)
Other reads
“Should Your Portfolio Protection Work Fast or Slow?” AQR.
Most importantly, drawdowns like the current one, in which adverse conditions impact public and private investment strategies in a persistent way, are the most damaging to investor portfolios — so they should matter the most when identifying strategies intended to improve a portfolio’s resilience.
“Lessons from FTX: The Cost of Ignoring ODD,” Castle Hall. The latest chapter of a long-running story.
“Portfolio Implications of a Positive Stock-Bond Correlation World,” Noah Weisberger and Xiang Xu, PGIM.
Shifting to a positive stock-bond correlation world will cause a balanced portfolio of stocks and bonds to deliver more volatile performance with a wider set of potential long-term outcomes — including more extreme tail events and deeper max drawdowns.
“Ideas That Changed My Life,” Morgan Housel, Collaborative Fund — and “Some Thoughts About Investing,” Ben Carlson, A Wealth of Common Sense. Concepts worth pondering.
“The Lies We Tell Ourselves About Startup Valuations, Scott Lenet, Touchdown Ventures (via CAIA Association). And some truths too:
Do your own work.
The last round is over, so price the new round independently.
It’s not your obligation to provide the startup with the amount of money they’ve requested.
“School of Quant: At $29,000, a Public NYC College Outclasses Princeton,” Heather Perlberg, Bloomberg. Baruch College is “Quant U.”
“Three Ideas I Wish I Had Understood From the Start,” Trevor Graham, TIFF.
Creativity is vitally important — and often underappreciated.
Being open-minded is more important than being smart.
A steady temperament might be the most important characteristic of all.
“Annual RIA M&A Outlook,” DeVoe. “The expectations are the lowest in the survey’s history.”
“Basic Interview Tips,” Frank Travers, LinkedIn.
Know when to be quiet (which should be most of the time if you are the interviewer). Ask your question, and then stop talking! This is a skill that very few people seem to be able to master. In addition, I have found that people generally are uncomfortable with silence and tend to keep talking (which can lead to new and interesting tidbits of information).
“When the Tech Revolution Came to Wall Street,” Marty Fridson, Stories.Finance. How technology has changed investing over the decades.
“Diversity Washing,” Andrew Baker, et. al, SSRN.
We document significant discrepancies between companies’ disclosed commitments and their hiring practices and classify firms that discuss diversity more than their actual employee gender and racial diversity warrants as “diversity washers.”
“International Private Equity and Venture Capital Valuation Guidelines,” IPEV. On your marks . . .
Limits
“Every person takes the limits of their own field of vision for the limits of the world.” — Arthur Schopenhauer
ESG
A year ago, ESG was hot. Now it’s a hot potato.
The Callan 2022 ESG Survey includes the above graphic. The blog summary regarding the survey says of the decline, “This can be attributed in large part to a significant drop in the share of public plans incorporating ESG, likely due to a shift in the respondents to this year’s survey.” Whatever the reason, the change is evident.
Meanwhile, “BlackRock Is Caught in the ESG Crossfire and Struggling to Get Out.” It’s not hurting yet though: “BlackRock has pulled in much more money from US retail investors than its rivals so far in 2022, even as the world’s largest asset manager has come under attack from both the left and right over its approach to sustainable investing.”
Postings
“To CFA Institute: Don’t Forget History” is available to all on LinkedIn. It details disappointing changes in the availability of content from the organization. (Also see David Merkel’s posting, “The Value of a CFA Charter: Ethics.”)
Two postings for paid subscribers:
“Essential Elements in External Networks.” Typically, most of the ideas that drive the performance of an investment function are shaped by interactions with others outside of the organization. How do we improve them?
“Dimensions of Learning for Investment Professionals.” What types of knowledge are important for investment professionals? How should they be trained? Alix Pasquet offers some thoughtful and differentiated ideas.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: December 19, 2022
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