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On to the readings.
Asset manager meetings
Joe Wiggins wrote a posting, “Are Fund Manager Meetings a Waste of Time?” in which he points out more than a dozen potential issues with those interactions.
Despite that, here is his conclusion:
Are fund manager meetings a waste of time? No. Is it a waste of time or worse if we don’t acknowledge or deal with the behavioural biases that we carry with us into those meetings? Almost certainly.
(Effective methods for dealing with the challenges Wiggins raises are a key part of the due diligence course in the Academy part of this site.)
Machine learning
In “How Can Machine Learning Advance Quantitative Asset Management?” David Blitz and others from Robeco cover the advantages and disadvantages of using that approach. As noted in the paper, “finance and investment is ultimately a social science that revolves around human behavior” — and machine learning methods “have shown particular promise in replicating” that behavior.
But there are pitfalls:
ML models are particularly useful for applications with a large amount of data and a high signal-to-noise ratio. In financial market research, however, the data sets are comparatively small and the signal-to-noise ratio tends to be low. Moreover, many data points are correlated, both in the time series and in the cross-section, which further reduces the effective number of observations.
The piece provides examples of how the techniques can be used, while stressing that “rigorous research governance” is a must.
ESG back and forth
It’s hard to keep up with all of the ESG-related political rhetoric, but there have been some notable developments of late. Liz Hoffman provides a short summary for Semafor in “The backlash to the ESG backlash is here.” The question of whether the exercise of fiduciary duty should be scripted by politicians is likely to go on for some time.
Interestingly, Rob Kozlowski of Pensions & Investments reported that the announcement of the search for a new chief investment officer in Florida “lacks any description of the responsibilities of the position or required qualifications of candidates interested in taking it on.” Given the “anti-woke” stance taken by Governor DeSantis, there may be at least one requirement.
Creating value with others
A paper from David Koenig is titled “Nested Freedom: The surprising and complex intersection of risk, risk perceptions, and an organization’s ability to create value,” and it concerns corporate governance and the responsibilities of boards of directors. The ideas included also apply to organizations in our industry, and to subsets of them such as investment committees and teams.
Fees
On Twitter, Christine Benz asked:
Discuss: Are higher expense ratios on stock mutual funds v. bond funds largely a convention of the industry? Or is it actually that much more costly to run a stock fund than a bond fund?
Those are good questions and the comment threads offer a variety of explanations and perspectives. What do you think accounts for the differences?
Other reads
“Swan lake: the risks that would most disrupt consensus in 2023,” New York Life Investments. Part of risk management is considering “not only the upside and downside scenarios to our base case views, but also black swans.”
“Major brokerages and news media feature technical analysis,” David Bailey, Mathematical Investor.
Given that “trends,” “waves,” “breakout patterns,” “triangle patterns,” “shoulders” and “Fibonacci ratios” make no sense in climatology or cardiology, why should one pay any attention to them at all in finance, much less base one’s life savings or other investments on such dubious reckonings?
“Private Equity Has Met the Enemy . . .” Herb Greenberg, LinkedIn. “Private equity is stuck, unable to flip these things to someone willing to pay even more.”
“Commodity investing and its role in a portfolio,” Anatoly Shtekhman, et. al, Vanguard. This primer “demystifies commodity investing by taking a deep dive into its returns, diversification benefit, and link to inflation.”
“Can ChatGPT Help Win Mandates? PanAgora Wants to Find Out.” Michael Thrasher, Institutional Investor.
While the technology is still in its infancy, it’s probably a good bet that other asset management companies will follow PanAgora’s lead, and not just to ease the laborious process of completing RFPs.
“Is There a Need for a Chief Liquidity Officer?” Michelle Teng, PGIM. The specific liquidity demands of different kinds of investors would be better addressed individually or in a longer piece, but the general point is well taken.
“Green Bonds, Empty Promises,” Quinn Curtis, et al, SSRN.
Green bonds often make vague commitments, exclude failures to live up to those commitments from default events, and disclaim an obligation to perform in other parts of the document.
”To Be Frank,” Chenmark. “Some thoughts on diligence” in light of JP Morgan’s embarrassing purchase of Frank, even if it just amounts to “an annoying PR debacle and a small write-off” for the behemoth.
“Big banks ignore risks and keep upping private markets investments.” Selin Bucak and Margaryta Kirakosian, Citywire Global Private Banker. A look at how alternatives are being used at some notable providers of private wealth management services.
“Great resignation hits DC plan committees,” Margarida Correia, Pensions & Investments.
More plan sponsors are reporting high turnover in retirement plan committees, losses that industry observers say have sent some plan sponsors scrambling to find new members and get them up to speed on their fiduciary responsibilities.
“The detailed, subjective ranking of research note graphic design you’ve always wanted,” Louis Ashworth, Financial Times. Most sell-side research reports look like each other, but this posting focuses on their relative aesthetics. More importantly, how would you reinvent the form of research reports to be more useful?
The play’s the thing
“These heroes of finance are like beads on a string; when one slips off, all the rest follow.” — Henrik Ibsen (1828-1906)
The conveyor belt
A core tenant of The Investment Ecosystem is the inexorable change that occurs over time across every dimension (except human behavior). One aspect of that is nicely visualized by Brett McDonald in a posting on his site, Paper & Blocks. What is “emerging” today may someday become “traditional,” turning early adopters into big winners. Organizations need to choose where along the belt they want to place their bets.
Postings
Two pieces have been distributed of late:
“Cliques and Claques in the Ecosystem.” This is a reposting of an earlier piece, not in front of the paywall, exploring how the disciplines of sociology and anthropology are essential to understanding both asset pricing and how organizations operate.
“Letters from the Ecosystem.” In this posting for paid subscribers, communications from MITIMCo, Permanent Equity, Jefferies, and Lindsell Train offer examples and lessons about conveying messages to clients and stakeholders.
All of the content published by The Investment Ecosystem is available in the archives.
Thanks for reading. Many happy total returns.
Published: February 27, 2023
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