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On to the readings, where you’ll find more on the acronyms of the day and lots of other good material too.
More AI
An edition of the Fortnightly last month started with the words “AI Über Alles.” The hottest topic around has only gotten hotter. AI stocks are spiking (although there are likely some pretenders in the group) and we are bound to see some company name changes like we have with other mad dashes for a theme. AI hype is not a new thing (witness this image from a SoftBank slide deck a few years ago), but it will dominate the investment conversation for a while, testing your BS detection skills.
The headlines are full of stories about AI conquering the investment world along with everything else. Some articles are of the existential variety, like “AI presents active management with its ‘Netflix-Blockbuster moment’,” from Citywire Pro Buyer, while others champion performance results, like “Goldman’s Hedge Fund ETF Is Crushing the S&P 500 With AI Bets,” from Advisor Perspectives. Those categories of stories are bound to be overflowing in the months ahead.
Two Bloomberg articles address some of the specific changes going on, characterizing firms as rewiring the world of finance and using ChatGPT to handle all of the grunt work. But, there are pesky shortcomings to be addressed, as shown by the now-famous case of the lawyer who filed a brief composed by ChatGPT (which invented all of the citations used in it). Similarly, a professor’s Twitter thread describes how each of the 63 essays generated via the tool by his students in response to an assignment had “hallucinated information.” Bringing it closer to home, Susan Mathews tried to get ChatGPT to address “internal ethics and compliance issues for an equity research firm.”
Which begs the questions: What functions are you comfortable using AI for today, given the possibility of “hallucinated information”? Investment ideas for client portfolios? Regulatory documents? Performance information? Client communications?
More ESG
It used to be that ESG was the hottest thing around, but now it’s in second. Still a big deal. Some worthwhile readings:
“ESG: From Process to Product,” George Serafeim, SSRN.
“Finding the path forward on ESG,” Susanna Gibbons, LinkedIn.
“Doing as Much Good as You Can: A Realistic Mini-Guide to ESG Investing,” Mike Sebastian, SSRN.
“The State of ESG in the US: An Apolitical Survey,” Robert Furdak, Man Group.
“How do practitioners use ESG data?” Joachim Klement, Klement on Investing.
Relations in flux?
Barnes & Thornburg released an “investment funds outlook” survey with the title “LP and GP Relations in Flux Amid Economic Volatility.” Such surveys can be interesting because they sometimes reveal differing views from those on opposite sides of the table.
For example, 58% of LPs think that fundraising is a pressing issue for GPs, while only 24% of GPs think that about themselves. Which group has a better read, the ones with the money or those trying to raise the money?
The top takeaway according to the firm is that LPs are getting more leverage and fund terms are changing as a result, indicating that 75% of the combined group of responders think that’s the case. Unfortunately, specific terms are also shown in a combined fashion — when the contrasting views of GPs and LPs regarding them would be illuminating.
Since GPs generally have been able to dictate terms (for decades), it remains to be seen whether the apparent flux will amount to any real changes.
Other reads
“Intangible Value: A Sixth Factor,” Kai Wu, Sparkline Capital.
We propose a Six-Factor Model, which includes market, size, value, quality, momentum, and intangible value. Relative to traditional factor models, it offers superior (backtested!) historical performance and more balanced exposure to innovative firms.
“I Don’t Know,” Ted Seides, Capital Allocators. In general, don’t “express absolutes in a world of probabilities,” with some specific examples.
“The Human Piranha Teaches Salesmanship,” Lenny Barshack, Stories.Finance. A lesson from long ago is still relevant today.
“Macro Do’s and Don’ts,” Edmund Bellord and Simon Hallett, Harding Loevner.
Even the most skilled forecasters, whatever their forecasting game, have but the tiniest of edges and so the surest way to increase their chances of success is to apply that minute edge as many times as possible.
“New Rules Reveal $64 Billion of Hidden Leverage at Big US Firms,” Nicola White, Bloomberg Law. Many companies (with more to come) reported “supplier finance obligations” for the first time.
“Everything I Learned Working For Steve Cohen,” Nick Colas, DataTrek Research.
Don’t make things harder than they have to be. In many ways, this was Steve’s cardinal rule. Focus on the basics, relentlessly, and the rest will fall into place.
“Montreal’s TCC: When a different world view pays off,” Sarah Rundell, Top1000funds.com. Spun out of Air Canada Pension Investments, the firm “uses its pension fund roots with the ethos of a relative value hedge fund for a unique investment approach.”
“Co-Occurrence: A New Perspective on Portfolio Diversification,” William Kinlaw, et. al, SSRN. Commonly-cited correlations are unstable, vary across interest rate and stability regimes, and don’t distinguish “when diversification is beneficial to a portfolio and when it is not.”
“They Came. They Saw. They Incinerated Half Their Funds’ Potential Returns.” Jeffrey Ptak, Morningstar. The third in a thematic series, this one on tactical allocation funds:
Based on the simple test we conducted, it appears they’ve subtracted value, costing investors about half of the return they could have earned if the manager had done nothing at all.
“Gen Z and Investing: Social Media, Crypto, FOMO, and Family,” FINRA Investor Education Foundation and CFA Institute. Social media is the leading source of financial information for that age cohort and cryptocurrencies are the most common investment type.
“Echo Chambers: The Benefits of Diverse Perspectives in Research,” Bob Schmidt, Brandes Center.
The people who do the best are the ones who see a diversity of signals — not the ones who see all one signal type.
“The United States of Bed Bath & Beyond,” Ben Hunt, Epsilon Theory. A series of three “bust-outs” in the stock illustrate the games that are played by those winning and those losing, “over and over again.”
“Undervalued talent in the NBA playoffs,” Tyler Cowen, Marginal Revolution. The “very real” benefits from being good at talent selection and training — a lesson for investment organizations.
“How Close is Tokenization for Mainstream Investors?” Danielle Walker, Chief Investment Officer.
“I think over the next two to five years, you are going to see every major regulator in the world, including the U.S. regulators, really get much clearer on how they want to regulate these new types of investment instruments,” [Franklin Templeton’s Sandy] Kaul says.
Reality on the ground
“All businesses are loosely functioning disasters, and some are profitable despite it. At 30,000 feet, the world is beautiful and orderly. On the ground, it’s chaotic and confusing.” — Brent Beshore of Permanent Equity, quoted by Chenmark.
Activists
A previous Fortnightly had two great readings on activist investing. A report from Goldman Sachs provides a number of charts that provide further analysis of the strategy, including the one above, which shows the significant difference in average and median returns of the target companies. In addition, there are lists of the activist campaigns since the start of 2022, the Russell 3000 stocks that are “vulnerable to shareholder activism,” and the twenty most frequent activist investors.
Postings
There were two more postings in the ongoing series about culture in the investment world (and the use of anthropology and other social sciences to understand it):
“Taking A Worm’s-Eye View” uses a book by Gillian Tett to take a broad look at some of the precepts of anthropology as they apply to the craft of due diligence.
“Cognitive Dissonance and Stasis in Active Management” looks at the “community of practice” that is active management, which is at a crossroads.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: June 5, 2023
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