| Areté Quarterly Q215 |
Business update
The biggest issue for Arete in terms of business happenings has been the continuation of challenging conditions for the asset management business. The Fed's persistence in continuing an aggressively loose monetary policy has created a market addicted to short term gains at the expense of longer term sustainability. In doing so it has created conditions which are distinctly antithetical to long term investment. Unfortunately it has also served to push back much needed reform for investment services.
Investors got a close-up look at the industry's many flaws during the depths of the financial crisis 2008/9 and were incensed by the problems. Most of these had existed for many years but big losses crystallized discontent. The rapid recovery in stock prices, however, allowed pressure for more meaningful and sustainable reform to dissipate. Investors want better ways to invest, but not so much when markets are strong. As a result, the hard reality is that the Fed policies have materially altered the timing of Arete's business opportunity.
One positive development for the investment community (and Arete), however, has been the emergence of some high profile leaders that are promoting many of the same investment values and practices as Arete. John Authers at the Financial Times, for example, has done an excellent job of highlighting the many ways in which the industry is not "fit for purpose" and suggesting alternatives. Paul Woolley, a former practitioner, established the Centre for the Study of Capital Market Dysfunctionality in association with the London School of Economics to study structural flaws in the industry and to recommend better practices.
While I absolutely applaud these efforts, I wanted to go even one step further by founding Arete; I wanted to do something about making the industry more "fit for purpose" by putting these ideas to work. Although the business prospects for this have been delayed, they are still very real and growing. In the meantime, I will continue to work with the types of individuals, organizations, and family offices that recognize the need to do better now.
Although the environment for investing has remained challenging, the environment for leveraging technology has remained exceptional. Indeed, one of the biggest successes of the last year was the launching of the Arete blog last summer. While the content remains very similar to what I posted in the newsletters previously, the blog creates an extremely flexible platform for distribution.
In addition to being posted on Arete's website and going out to the regular email distribution list, blog posts now appear in Seeking Alpha, Advisor Perspectives, LinkedIn Pulse, Twitter, and StumbleUpon. Exposure to these audiences has substantially increased readership and expanded Arete's following. This success also reaffirms my belief that there are a lot of people that are looking for knowledgeable and unconflicted sources of investment insight which is, of course, Arete's bailiwick.
On the subject of technology, I am surrounded by it at Betamore and these experiences have suggested some useful actions. For example, an overarching goal of most of the firms and freelancers is positive "user experience". In other words, messages should be easy to understand and websites should be easy to navigate. Since Arete is all about quality, user experience has always been an important priority, although admittedly, this has tended to focus more on content and research (function) than on polished presentation (form).
As a result, I will be working on updating many aspects of the website and you will already notice some important changes. The website started primarily as a repository of useful information and it will retain that functionality. The changes will focus both on design, to make it more visually compelling, and on performance, to make it more responsive to visitors. Further, I have added a discussion forum to the "Reading list" section (and may add more) with the intent of facilitating a deeper and more meaningful way to engage with investors. If you have other suggestions for the website, please let me know! If you have investment questions or comments, please join the discussion!
I also wanted to provide an update on the personal CIO service that was launched last quarter. The good news is that there has been a great deal of interest and most people I talk to agree that there is a lot of unmet demand out there. The less good news is that most people feel that they and their organizations are in good shape but believe there are many less fortunate investors who could benefit.
While it may certainly be true that a number of these people and organizations are truly in good shape for whatever may happen in the market, I also strongly suspect this is less the case than many imagine. This sense comes from seeing all too clearly the inner workings of large, medium, and small investment management organizations and all of the things that happen that just don't help investors. While some of these things are well documented, many are not.
One thing I have experienced firsthand, for example, is the institutional bias towards growing assets at the expense of investment performance. I was a technology analyst during the internet boom and got beaten up almost every day for refusing to add to absurdly overvalued technology positions. The crazier valuations got, the more I got beaten up. My rational arguments about valuation and business prospects simply did not hold weight to the institutional demands to "go with the flow". Did the company have a ton of resources? Yes. Were there a lot of very smart people? Yes. Did investors, avoidably, lose a ton of money when the tech boom crashed? Unfortunately, yes.
Jim Ware, author of High Performing Investment Teams, identified a broader challenge in a 2010 article [here]. In addressing the industry's need for "strong ethical leaders," he asks the question outright, "So why do firms often engage in practices that betray their own principles (and best interests)?" Through anonymous polling of industry participants he found that the vast majority believe "investment firms routinely commit these [ethical] breaches" and that most agreed that, "Yes, those breaches occur at our firm." His conclusion is that as long as people believe that most industry participants will take the low road, "The smart response, according to game theory, is to do likewise."
I could provide plenty more examples to complete the mosaic, but suffice it to say, there is a great deal of investment expertise that never reaches investors. In my opinion, the most important source of such "friction" is a dearth of quality leadership. In the absence of leaders demanding to take the high road, we end up with complex and conflicted organizations that simply don’t serve investors well. I think the CFA program has done a lot to improve the situation, but it is nowhere near enough. Arete and a handful of other firms are trying to create something better.
So, yes, I do suspect that there are many investment clients who are not getting advice that is as high in quality as they might think. What I fear might happen, and I hope doesn't happen, is that many investors will feel reasonably assured that they are positioned fairly well until we get another big market disruption. And, just like the last time, it will reveal a lot of ugliness that was overlooked in better times. Then I will get a million calls to explain what went wrong, but only after it's too late to prevent major damage.
I do think it is a great time to get very clear on investment strategy, expectations for the future, and various risk scenarios. This doesn’t necessarily imply any huge changes; it can start with just getting a “second opinion”. If you know of anyone who might be interested in talking, please let me know. I think the personal CIO is an outstanding offer and it is absolutely free to try out.
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager
The biggest issue for Arete in terms of business happenings has been the continuation of challenging conditions for the asset management business. The Fed's persistence in continuing an aggressively loose monetary policy has created a market addicted to short term gains at the expense of longer term sustainability. In doing so it has created conditions which are distinctly antithetical to long term investment. Unfortunately it has also served to push back much needed reform for investment services.
Investors got a close-up look at the industry's many flaws during the depths of the financial crisis 2008/9 and were incensed by the problems. Most of these had existed for many years but big losses crystallized discontent. The rapid recovery in stock prices, however, allowed pressure for more meaningful and sustainable reform to dissipate. Investors want better ways to invest, but not so much when markets are strong. As a result, the hard reality is that the Fed policies have materially altered the timing of Arete's business opportunity.
One positive development for the investment community (and Arete), however, has been the emergence of some high profile leaders that are promoting many of the same investment values and practices as Arete. John Authers at the Financial Times, for example, has done an excellent job of highlighting the many ways in which the industry is not "fit for purpose" and suggesting alternatives. Paul Woolley, a former practitioner, established the Centre for the Study of Capital Market Dysfunctionality in association with the London School of Economics to study structural flaws in the industry and to recommend better practices.
While I absolutely applaud these efforts, I wanted to go even one step further by founding Arete; I wanted to do something about making the industry more "fit for purpose" by putting these ideas to work. Although the business prospects for this have been delayed, they are still very real and growing. In the meantime, I will continue to work with the types of individuals, organizations, and family offices that recognize the need to do better now.
Although the environment for investing has remained challenging, the environment for leveraging technology has remained exceptional. Indeed, one of the biggest successes of the last year was the launching of the Arete blog last summer. While the content remains very similar to what I posted in the newsletters previously, the blog creates an extremely flexible platform for distribution.
In addition to being posted on Arete's website and going out to the regular email distribution list, blog posts now appear in Seeking Alpha, Advisor Perspectives, LinkedIn Pulse, Twitter, and StumbleUpon. Exposure to these audiences has substantially increased readership and expanded Arete's following. This success also reaffirms my belief that there are a lot of people that are looking for knowledgeable and unconflicted sources of investment insight which is, of course, Arete's bailiwick.
On the subject of technology, I am surrounded by it at Betamore and these experiences have suggested some useful actions. For example, an overarching goal of most of the firms and freelancers is positive "user experience". In other words, messages should be easy to understand and websites should be easy to navigate. Since Arete is all about quality, user experience has always been an important priority, although admittedly, this has tended to focus more on content and research (function) than on polished presentation (form).
As a result, I will be working on updating many aspects of the website and you will already notice some important changes. The website started primarily as a repository of useful information and it will retain that functionality. The changes will focus both on design, to make it more visually compelling, and on performance, to make it more responsive to visitors. Further, I have added a discussion forum to the "Reading list" section (and may add more) with the intent of facilitating a deeper and more meaningful way to engage with investors. If you have other suggestions for the website, please let me know! If you have investment questions or comments, please join the discussion!
I also wanted to provide an update on the personal CIO service that was launched last quarter. The good news is that there has been a great deal of interest and most people I talk to agree that there is a lot of unmet demand out there. The less good news is that most people feel that they and their organizations are in good shape but believe there are many less fortunate investors who could benefit.
While it may certainly be true that a number of these people and organizations are truly in good shape for whatever may happen in the market, I also strongly suspect this is less the case than many imagine. This sense comes from seeing all too clearly the inner workings of large, medium, and small investment management organizations and all of the things that happen that just don't help investors. While some of these things are well documented, many are not.
One thing I have experienced firsthand, for example, is the institutional bias towards growing assets at the expense of investment performance. I was a technology analyst during the internet boom and got beaten up almost every day for refusing to add to absurdly overvalued technology positions. The crazier valuations got, the more I got beaten up. My rational arguments about valuation and business prospects simply did not hold weight to the institutional demands to "go with the flow". Did the company have a ton of resources? Yes. Were there a lot of very smart people? Yes. Did investors, avoidably, lose a ton of money when the tech boom crashed? Unfortunately, yes.
Jim Ware, author of High Performing Investment Teams, identified a broader challenge in a 2010 article [here]. In addressing the industry's need for "strong ethical leaders," he asks the question outright, "So why do firms often engage in practices that betray their own principles (and best interests)?" Through anonymous polling of industry participants he found that the vast majority believe "investment firms routinely commit these [ethical] breaches" and that most agreed that, "Yes, those breaches occur at our firm." His conclusion is that as long as people believe that most industry participants will take the low road, "The smart response, according to game theory, is to do likewise."
I could provide plenty more examples to complete the mosaic, but suffice it to say, there is a great deal of investment expertise that never reaches investors. In my opinion, the most important source of such "friction" is a dearth of quality leadership. In the absence of leaders demanding to take the high road, we end up with complex and conflicted organizations that simply don’t serve investors well. I think the CFA program has done a lot to improve the situation, but it is nowhere near enough. Arete and a handful of other firms are trying to create something better.
So, yes, I do suspect that there are many investment clients who are not getting advice that is as high in quality as they might think. What I fear might happen, and I hope doesn't happen, is that many investors will feel reasonably assured that they are positioned fairly well until we get another big market disruption. And, just like the last time, it will reveal a lot of ugliness that was overlooked in better times. Then I will get a million calls to explain what went wrong, but only after it's too late to prevent major damage.
I do think it is a great time to get very clear on investment strategy, expectations for the future, and various risk scenarios. This doesn’t necessarily imply any huge changes; it can start with just getting a “second opinion”. If you know of anyone who might be interested in talking, please let me know. I think the personal CIO is an outstanding offer and it is absolutely free to try out.
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager
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