We are still in the first few weeks of The Investment Ecosystem, and already there is a nice repository of content for you to read. A summary of recent posts is found at the end of this posting. (Make sure to check out the ESG piece if you haven’t seen it.)
And if you’re on the free tier, now is a good time to consider the wider array of offerings. The Founder plan goes away after December 31.
On to the readings.
Around the ecosystem
Active share, a metric that has only been around a dozen years or so, is the subject of a new Morningstar paper. You might be able to tell the conclusion of the analysis by the title: “Unattractive Share: A much heralded measure of active management has failed to steer investors into funds with consistently strong performance.” The firm finds that high active share funds tend to have higher fees and higher volatility — and “failed to deliver superior net-of-fee results in any category.”
The Thinking Ahead Institute of Willis Towers Watson released its 2021 list of the world’s largest asset managers (the data is as of the end of 2020). This was striking:
Investments is a fast changing industry: 221 names on the list of 500 largest asset managers ten years ago are absent from our latest 2020 list. Over the past decade, there seems to be a quickening of pace of competition and consolidation, with some rebranding.
If you’re interested in getting in the weeds regarding 36+ years of developed market equity composition and returns, check out this report from @jesse_livermore. It decomposes the fundamental results, the valuation changes, and the resulting performance for sectors and stocks over that time. Start with the guide and definitions up front (and use the table of contents feature in your PDF reader to find your way around easily).
A Barron’s cover article called this “the weirdest time in history for finance.” One outstanding feature is the “Tesla-financial complex” — what to some people is a car company is now another thing altogether, given “the idiosyncratic force it now exerts over the stock market.” The Financial Times has the story. Tesla’s outsized influence is causing contortions and distortions in the market system, and no doubt there are more strategies that we won’t know about until some fateful day. (When retail investors are talking about estimated TSLA dealer gamma exposure, the game has changed.)
A statement from the SEC focused on “the importance of high quality independent audits and effective audit committee oversight,” saying that a good committee “facilitates communications among the board of directors, management, internal auditors and independent auditors.” In addition, it “enhances auditor independence from management” and is “instrumental in setting the tone at the top.” The general assumption is that having financial experts on the committee improves the quality of earnings. That’s called into question by a paper (a portion of the title is “Wolves in Sheep’s Clothing?”), which postulates that sometimes that expertise is used to help management manipulate earnings rather than inhibit the manipulation of them.
Crypto
Notwithstanding the dip in cryptocurrencies of late (those at the Thanksgiving table must not have been convinced/convincing), all kinds of organizations are trying to figure out whether to get on the bandwagon — and some have clients giving them a shove. Among the recent headlines: “Popularity of crypto funds sparks growing interest from managers” (FT). “Pension Funds Discover Cryptocurrencies” (finews). “Crypto fever: the pressure grows on wealth managers” (FT).
As the institutional use of crypto increases, there is more and more asset allocation research that tries to put it in the traditional return, volatility, and correlation portfolio setting. (Good luck with that.) Here’s a Tommi Johnsen review of one paper, via Alpha Architect.
Those of a certain age were taken back in time upon hearing the news that the Staples Center in Los Angeles (where the Lakers, Clippers, Sparks, Kings play) is being renamed Crypto.com Arena. There were those disastrous naming episodes of the past, especially during the dot-com era. Luckily, Concinnus Financial did an analysis last year of the companies who have bought naming rights. Some ended up bankrupt, others stalwarts. Concinnus’ assessment was that the purchase of naming rights “generally does not align with the best interest of shareholders.”
Other good reads
“My Clearinghouse Love Letter,” Front Month. An explanation of the role that these important market structure entities play.
“Wild Bidding Wars Erupt at Used-Tractor Auctions Across the U.S.,” Bloomberg. There are markets in everything; here’s a fun look at one of them.
“Paradoxes of Life,” Sahil Bloom, The Curiosity Chronicle. Wonderful, short takes on “20+ powerful paradoxes on growth, business, investing, and life.” Also, look at the visual summary of them by Sachin Ramje.
R.I.P., Peter Marcus. The obituary for the long-time steel analyst said that he “spent his entire life visiting steel plants in the unglamorous outskirts of every continent.” He is quoted as having said, “I’m a juggler of ideas and a seeker of patterns.”
Quote
“Research is formalized curiosity. It is poking and prying with a purpose.” — Zora Neale Hurston.
Twenty years of returns
A New York Times article two weeks ago said that returns in India have been “luring investors from home and abroad.” It has outdistanced the three other Asian indexes show above over the last two decades. (These are total returns for a yen-based investor. The S&P 500 would rank third in this group on that basis, at 446%.)
Recent postings
The most recent posting, “The ESG Juggernaut and Points of Pushback,” is must reading given the importance of that topic across every kind of investment organization. Other postings cover a novel approach to portfolio construction using ensemble methods, the problem with distribution yield, a look at the reinvention of an old media company, and the importance of taking time to read books (including some good lists of them). The archives of the site are found here.
Published: November 28, 2021
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