There’s quite a variety of topics explored in this issue. Let’s get into them.
Liquid venture capital
The published research from Sparkline Capital is always interesting and informative, with plenty of helpful charts. Its latest report, “Liquid Venture Capital,” is no exception. From the conclusion:
The true source of venture returns is innovation, which also occurs at public companies, both large and small. We believe that investors should extend their “innovation allocation” from venture capital into public equities. This should help investors capture the full innovation lifecycle while enjoying greater liquidity.
In setting up the idea, Sparkline founder Kai Wu touches on power laws, the attributes of venture investments, the current glut of dollars in the asset class, and the lack of markdowns and down rounds — which are obscuring real valuations. And, as has previously been shown with buyout funds, the paper argues that venture returns can be replicated using public securities.
After a section on the opportunities in the crypto world, the lifecycle of innovation comes into focus. Sparkline recommends a combined approach, using classic venture capital, early-stage innovation stocks, large-cap innovation stocks, and crypto tokens.
Fixed income
Here are several good pieces on different aspects of the fixed income landscape:
“Beyond the core: A new model for allocations to fixed income supersectors,” Jared Gross, J.P. Morgan Asset Management. This contrasts the composition of the most common U.S. benchmark, “the Agg,” with the range of fixed income sectors today; looks at those sectors against the objectives of stability, income, and diversification; and traces the index’s history back to Kuhn, Loeb:
A small seed planted by the firm’s bond research department in 1973 took hold and has grown into the mighty oak known as the Aggregate Bond Index (the “Agg”).
“Do Active Core Plus Fixed Income Managers Add Value With Sector Rotation?” Kevin Machiz, Callan. The author adds high yield (but not the other non-Agg) sectors above to compare with the performance of the Callan Core Plus Peer Group and concludes that sector rotation on average has added value.
“Returns plus Resilience? A Closer Look at Leveraged Finance,” bfinance. A good example of an educational read by the consultant, providing a clear outline of an emerging category.
Data alliance
Paid subscribers received a piece on Friday that highlighted some of the great content from the CFA Institute Research Foundation. Now that entity is rapidly building up the Investment Data Alliance, “a partnership between the CFA Institute Research Foundation and various investment organizations where data and content related to data is shared with investment professionals.” Access to some of the sources is restricted to CFA Institute members, while others are open to the public. Quite a range of data overall.
Family offices
Jonny Lach wrote an article for Family Office Exchange, “Private Investors, Carpe Diem!” In contrast to many other investment organizations, where there are “natural conflicts of interest” between asset owners and agents, at a family office:
The wealth owner can readily create compensation structures, governance structures and an investment office culture to align staff and committee objectives with those of the owners.
For example, a family office can pay staff based on performance of an appropriate benchmark designed to reward staff performance (i.e. not legacy investments and not market betas).
However, “If you want your staff to invest like partners, you must reward them as such.”
Whether in-house or outsourced, families need trustworthy advisors, the subject of a posting from TFOA, “How to Surround Your Single Family Office With Great Advisors.”
Portfolio manager attributes
There have been many studies about various characteristics of portfolio managers and how they relate to performance (or appear to relate to it). Here’s a couple more: one that finds that “managers who are born later in the sibling hierarchy take on more investment risks relative to first-born managers, but perform worse,” and the other, which says, “Fund managers who run marathons deliver higher risk-adjusted returns.”
Other reads
“The Learning Mindset for Investors with Alix Pasquet,” Frederik Gieschen, Neckar’s Minds and Markets.
If your behavior hasn’t changed, you haven’t learned. Learning is not sitting on a desk, and cramming your brain with knowledge that you’re going to recite one day.
“These Institutional Investors Are Already Paying For Climate Change. They’re Investing to Fix That.” Hannah Zhang, Institutional Investor. Long-term, risk-focused firms that have been ahead of the pack in altering how they invest because of climate change.
“The power of teams in investment management,” Richard Farrell, RBC.
Do we want as many experts on the team as possible? Do we want academics, or experienced investors? Should we have a strict hierarchy, or should we aim for no hierarchy? How big should the team be? How relevant are the characteristics of the team members?
“The Road Ahead: Eight Things Investors Can No Longer Rely On,” Man Group. Profound changes in important relationships underlying asset allocation decisions.
“(Black)Rock the Vote: Index Funds and Opposition to Management,” Joseph Farizo, SSRN.
I show index funds are more likely to oppose management on contentious management sponsored proposals at firms held only by their family’s index funds than on proposals at firms co-held by their family’s active funds. Additionally, shareholder proposals garner a greater level of support by index funds when the firm’s shares are not simultaneously held by a fund’s same-family active funds. Consistent with “locked-in” motives to monitor, these results imply index funds participate as more engaged voters when same-family active funds avoid holding positions in a firm.
“Why we need to talk about QT,” George Steer, Financial Times. “In other words, investors haven’t yet woken up to just how aggressive this cycle of QT is going to have to be.”
“The Myth of Open-end Fund Underperformance,” Jared Gross, et. al, J.P. Morgan Asset Management.
Evidence suggests that perpetual-life, open-end core/core-plus strategies can deliver returns of a similar magnitude to closed-end funds while offering materially better access to capital and lower risk.
“Why Fundamentals Matter,” Jamie Catherwood, Canvas. An historical perspective on multiple change versus fundamentals.
“The Price of Time,” Laurence Siegel. A review of Edward Chancellor’s new book, The Price of Time (and so much more).
“Right on Target? Plan Sponsors May Not Always Consider Participants’ Behavior or Needs When Selecting Target-Date Glide Paths,” Lia Mitchell and Aron Szapiro, Morningstar.
It is clear that there is too much homogeneity in off-the-shelf glide paths that employers use given the heterogeneity of their workers’ needs.
“Broyhill Book Club,” Broyhill Asset Management. The latest edition of the firm’s terrific annual selection of books and other resources.
Not normally distributed
“Life always has a fat tail.” — Eugene Fama, quoted in When Genius Failed.
Postings
Two recent postings:
“The Red, Amber, and Green of Performance Tests” looks at recent performance tests instituted by regulators, as well as the explicit and implicit ones that guide allocator behavior when selecting managers.
Mentioned earlier in this edition, “Research Foundation Readings” surveys some of the material available from the CFA Institute Research Foundation by focusing in on important aspects of the investment ecosystem, behavioral finance, fiduciary responsibility, and the financial crisis.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: September 12, 2022
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