research puzzle pieces

Apr 16

catalyst investing

I’ve been going through materials from the late 1990s and early 2000s, remainders from a truly amazing time that I was going to write about in some depth but never did.  The number of extraordinary stories was mind-boggling.

Among the papers was a Wall Street Journal article from December 3, 1999:  “Day Trader Profits For Over 20 Years.”  That trader was Steven Cohen, by then seven years into his run at SAC Capital.  The outlines of the story are there:  Bigger-than-big fees, huge trading volumes, and “an enviable information network.”

Cohen was quoted as saying, “It’s not growth investing.  It’s not value investing.  It’s short-term catalyst investing.”

The story, by Mitchell Pacelle and Charles Gasparino, includes this:  “Mr. Cohen doesn’t trade blind.  Rather, he makes educated guesses about when stocks will move, or stop moving.”  As his firm’s success led to more assets under management, Cohen also sought to school the other traders at the firm in “the SAC way.”

Like a lot of things from the period, that way — that edge — looks different in hindsight than it did at the time.  However, the dot-coms started blowing up within weeks of that story, the mega-caps were soon deflating, and revelations of shoddy accounting and analysis ultimately ruined the reputations of captains of industry and kings of the Street.

But it took a good long while for “catalyst investing” to come under fire.  When it did, some of the foot soldiers came to grief, but the general lived on to trade another day.

Apr 06

managed solutions

The 28-page (in large format) “special advertising supplement" in a recent InvestmentNews was titled, “Managed Solutions: Meeting Today’s Challenges.”  It was sponsored by the Money Management Institute, which bills itself as “the leading voice for the global financial services organizations that provide advice and professionally-managed investment solutions to individual and institutional investors.”

Given the publication that the supplement appeared in, it was targeted not at investors of either stripe, but at financial advisors, who are the intermediaries through whom the services are offered. 

So, you might say, what are “managed solutions”?  According to the supplement, they share the attributes of fee-based pricing, a client assessment process, a “single proposal system,” research on available investments, consolidated performance reporting, and rebalancing, tax management, and customization.

Some of the products put under the umbrella include separately managed accounts, “rep as portfolio manager” offerings, mutual fund advisory, unified managed accounts, “rep as advisor” solutions, ETF managed portfolios, model portfolio programs, and unified managed household structures.

The question becomes, “What is right for the client?”  Is there unnecessary complexity in these solutions?  Who is doing the “management”?  (In some cases, it comes from advisors with little time to devote to investment research and analysis.)  And, what are the fees?

The last question is an important one.  Adding up an advisor’s fees and the fees for the providers that are used, you can get to some pretty big numbers.  “Managed solutions” can turn out to be “expensive solutions” without commensurate benefits.  That should be a bigger deal for the industry than it seems to be.

Apr 02

a beautiful thing

The “beautiful thing” of the title is revealed toward the end of a recent essay from Ben Hunt of Salient Partners.  As is typical of his writings that “view capital markets through the lenses of game theory and history,” Hunt provides some interesting context, beginning with Apocalypse Now and closing with T. S. Eliot to illustrate his points about “information and communication, authenticity and deception.”

In between are fake Web traffic and fake popularity, “positioning rather than investing,” and “public misdirection and miscommunication as an acceptable policy ‘tool.’”  What is real and what is narrative?  And what are the actual risks and rewards versus the “stories of risk and reward”?

These are important questions for investment decision makers, in terms of the economic environment and the market framework, and also in regard to a variety of micro considerations like manager analysis and selection.

I am always on the lookout for people who can help me think differently about issues — or think at all about ones that I haven’t been seeing.  I have only read Hunt for a few months, but I included him in the resources section of my new book because of his ability to do that for me.  That is another beautiful thing.

Mar 20

de-risk and return

An advertising supplement to the latest edition of Pensions & Investments is titled, “Fixed Income Investing: Coping with Low Rates, Volatility and Tapering.”  The first piece is “It’s a Tale of Two Cities.”

It relates to the different paths being taken by pension plans.  Jesse Fogarty of Cutwater sums up one of the main divisions:  “Corporate plans are extending their duration into higher quality bonds to better match their liabilities.  On the other side of the coin, public plans are reducing duration and going down the quality spectrum in the search for higher yield.”

In addition, all sorts of definitions are cropping up to describe fixed income approaches, and “absolute return, total return, opportunistic, multi-sector and go-anywhere are terms that can be sometimes used interchangeably, making it difficult for investors to understand fully the nature of the strategy.”  Much of what’s out there translates as, “Just find me some return some place.”  The flowering of those strategies bring forth an important question for those who have read David Swensen’s discourse on “impure fixed income”:  What’s the intended role of fixed income in the portfolio?

Different investors are answering that question in radically different ways.  There are a variety of constituencies, some trying to de-risk relative to liabilities and some trying to boost returns in a low rate environment.  Some following benchmarks that may or may not make sense and some aiming for absolute returns.  Some focusing on protection from deflation and calamity and some trying to generate income.

These various constituencies are approaching the investment in fixed income in radically different ways.  (The word constituencies is resonating with me because of an article I read yesterday about the different kinds of equity investors.)  The investment ecosystem is full of species, adapting to the same market environment by making disparate choices, each attempting to thrive (or just survive).

Mar 07

due diligence questions

I guess it is time to revisit PIMCO and Bill Gross and Mohamed El-Erian, since the headlines have started up again.  When last we visited the soap opera, I had a simple question:  “What’s the most important job of a chief investment officer?”

This time, other questions.  Given the thousands of due diligence questionnaires (DDQs) filled out by consultants, institutional investors, and investment advisors about PIMCO, how many of them identified the issues in advance?

Who questioned the firm’s process?

Who saw past the fame of the key people and identified the cultural rifts?

Truly, I’m interested in knowing, because I don’t think there are many DDQs extant among those thousands that give a hint of what was happening at PIMCO.

We see performance and infer process.  We recognize accomplishment and grade the “people” questions in that light.

"I’ve never seen Bill and PIMCO scrutinized like this before," Eric Jacobson of Morningstar was quoted as saying in a Reuters story.

The purpose of those DDQs and the whole of due diligence is to get at the issues in advance.  A very tough standard.  Who met it in this case?

Feb 24

alts boot camp

This morning I tweeted this image:

It came from Pioneer Investments.  You can see the footnotes to the chart on its website; I distributed the image today as an example of the superficial simplicity with which retail alternatives are being marketed.

The vehicles are springing up left and right and the money is pouring in.  How many of the buyers could pass an investment challenge (like this one) as to how the alternatives work or what might cause them not to work in the future?

Then, this afternoon, MFWire came out with a story that Pioneer is sending its sixty (count ‘em, sixty) wholesalers to “alts boot camp.”

That’s a good thing, in that more education on the topic is needed, although I fear that the education might be primarily focused on the how-to-sell-them points rather than the nuances and traps of this very complex set of investment vehicles that have been packaged together in a one-word meme.

The fever is getting hotter by the day and the industry is ramping up its marketing efforts ever more.  Remind me, historically has that been a good time to buy what’s being sold?

Feb 13

on mount rushmore

LeBron James made news by saying that by the time he’s done he’ll be on the Mount Rushmore of pro basketball.  (He currently picks Michael Jordon, Magic Johnson, Larry Bird, and Oscar Robertson as being on the mountain; others have their own lists.)

It reminded me of a lunch I had with Byron Wien in the mid-1990s in a Morgan Stanley private dining room.  I worked for a big client of the firm and was putting together a hedge fund, so I was going around talking to hedge fund managers and others, like Wien, who knew the business well.

What I remember most was his discussion of the Mount Rushmore of hedge fund managers.  At that time, there were three consensus choices:  George Soros, Julian Robertson, and Michael Steinhardt.  What motivated many in the business, according to Wien, was not just the wealth that came from a successful fund but the chance to be in that fourth spot.

Almost twenty years later, it’s interesting to look back at the waves of managers who have been considered candidates.  At the time of the lunch, Meriwether was a popular pick to make it, but then LTCM fell apart.  Druckenmiller, Griffin, Lampert, and Simons gained favor at various times.  There are those like Paulson, who many think is a one-hit wonder, and Cohen, who probably will appear in the record books with an asterisk — plus lots of other names I could mention as being in the competition.

Of the original three, Robertson and Steinhardt backed away (no shame in that), but Soros kept on going.  As with sports, comparing investors from different eras is very difficult.  The numbers are bigger now in every way, so dollar comparisons aren’t valid.  And, despite many tumultuous episodes, we haven’t had a sustained unfavorable investing environment in decades.  It might make a difference when we do.

We’ll see who stands the test of time, but if you were going to carve the mountain today, 65 years in, who would be on it?

Feb 09

going live

Last week I did a chart on pix (one of the three research puzzle sites) which looked at the performance of three different index weighting schemes.

Two of them, the S&P 500 (market-weighted) and the S&P 500 Equal Weighted are obviously closely related, with the same securities, just weighted differently.  The third index shown, the FTSE RAFI 1000, draws from a larger group of companies and is fundamental weighted.  (The ETFs for the indexes are SPY, RSP, and PRF, respectively.)

I received a good question from a well-known financial journalist regarding the chart:  When did the RAFI index “go live”?  The answer:  Late November, 2005.  That meant that much of the chart represented backtested returns rather than live returns, which was precisely the point of the question.

For the sake of completeness, it should be noted that the S&P 500 Equal Weighted also was not in existence throughout the period of the chart.  It went live in January 2003.  As mentioned earlier, it shares the same securities as the S&P 500, plus the weighting scheme is fixed, so the backtesting issue doesn’t come into play.  Nevertheless, like the RAFI, it was not around in 1990 or for many years thereafter.

This is an issue that gets lost in a lot of analysis and, yes, I lost it in this case.  That’s why it’s good to have sharp readers.  Here’s the chart with the “live” dates marked in the lower panel.