| Areté Quarterly Q216 |
Business update
I founded Areté based on the belief that the investment landscape would become increasingly difficult and would require professional help for most investors. I also believed that exceptionally few investment services provided outstanding value to investors. I concluded that things would have to change as economic necessity forced investors to demand better value.
Thus far I have been wrong. While I was right that investors sought change after the financial crisis in 2008 and 2009, the nature of that change was more one dimensional and short term oriented than I anticipated. Of the two big trends that did emerge, both involve leaving traditional active managers and both seem to involve some spurious reasoning.
One push was to just leave active management altogether and go with cheap index funds and exchange traded funds (ETFs). This trend has been clearly evidenced by money flows. Another push was to “double-down” on the market and essentially become more active by increasing allocations to hedge funds and alternative investments.
In both cases investors sought “better” solutions, but the conception of “better” is overly simplistic. For pension funds, foundations, and other similar funds, “better” means high enough returns to meet existing spending plans or to hit (often unrealizably high) return targets. For many other investors, fees are the single biggest problem and the cheaper the better.
The argument for hedge funds has historically been that you get the “cream of the crop” in terms of expertise, capabilities, and ultimately returns, but you have to pay up for it. In too many cases, however, the benefits fail to outweigh the costs. This situation is being made progressively worse by an environment of exceptionally low interest rates.
Increasingly, hedge fund investors are beginning to speak out against the poor value these services offer. For example, New York City Employees’ Retirement System liquidated all of its hedge fund investments. Letitia James, the city’s public advocate, complained in the Financial Times [here], “Hedge funds … believe they can do no wrong, even as they are losing money”. She continued, “If they truly cared about New York’s pensioners, ‘they would never charge large fees for failing to deliver on their promises’.”
On the other end of the spectrum, a wide swath of investors has been migrating to the “everyday low prices” of index funds. While these funds often (but not always) offer much lower prices than actively managed funds, just like at Walmart, you don’t always get great stuff and you certainly don’t get much, if any, service to help you out. For very basic stuff this can be fine. For more complicated or high-value stuff it can end up costing more in the long run.
In an investment landscape dominated by monetary policy, investing can seem like pretty “simple stuff”. You just put money in the market and it goes up. Easy. One of the great disservices of such extreme policy, however, is that it artificially suppresses volatility and artificially inflates asset prices. In other words, it makes investing look a lot easier than it is, at least for a period of time. And that can effect the decision of where you shop.
Ben Hunt addressed this issue [here] when he stated: “Specifically, extraordinary monetary policy has obliterated the focal points of price discovery. When you no longer have Common Knowledge regarding the price of money, you don’t have Common Knowledge regarding the price of anything.”
This assessment, with which I agree, dispels any notion that the “market always knows best” or that investing is an easy, one dimensional decision. Those who believe that their wealth is better represented by numbers on their month end statements than by the value of the stream of cash flows represented by the underlying ownwership positions are setting up for a pretty big disappointment.
Nonetheless, the clear shortcomings of the hedge fund and passive approaches begs the question of why there hasn’t been a stronger movement to find better and more efficient versions of the active management model. After all, the flaws of active management that were revealed in the financial crisis had already been fairly clear for some time. Further, none of these flaws are inherent to the practice of active management, but rather reflect the business choices that many, but not all, active managers make.
Across many parts of the economy consumers are leveraging information and connectedness to become better consumers. As they become better informed, they are also demanding better value. While the field of investment services has been rather immune to these trends, it is ripe for change. Sooner or later, investors are going to demand better overall value from providers and Areté is here to provide just that.
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager
I founded Areté based on the belief that the investment landscape would become increasingly difficult and would require professional help for most investors. I also believed that exceptionally few investment services provided outstanding value to investors. I concluded that things would have to change as economic necessity forced investors to demand better value.
Thus far I have been wrong. While I was right that investors sought change after the financial crisis in 2008 and 2009, the nature of that change was more one dimensional and short term oriented than I anticipated. Of the two big trends that did emerge, both involve leaving traditional active managers and both seem to involve some spurious reasoning.
One push was to just leave active management altogether and go with cheap index funds and exchange traded funds (ETFs). This trend has been clearly evidenced by money flows. Another push was to “double-down” on the market and essentially become more active by increasing allocations to hedge funds and alternative investments.
In both cases investors sought “better” solutions, but the conception of “better” is overly simplistic. For pension funds, foundations, and other similar funds, “better” means high enough returns to meet existing spending plans or to hit (often unrealizably high) return targets. For many other investors, fees are the single biggest problem and the cheaper the better.
The argument for hedge funds has historically been that you get the “cream of the crop” in terms of expertise, capabilities, and ultimately returns, but you have to pay up for it. In too many cases, however, the benefits fail to outweigh the costs. This situation is being made progressively worse by an environment of exceptionally low interest rates.
Increasingly, hedge fund investors are beginning to speak out against the poor value these services offer. For example, New York City Employees’ Retirement System liquidated all of its hedge fund investments. Letitia James, the city’s public advocate, complained in the Financial Times [here], “Hedge funds … believe they can do no wrong, even as they are losing money”. She continued, “If they truly cared about New York’s pensioners, ‘they would never charge large fees for failing to deliver on their promises’.”
On the other end of the spectrum, a wide swath of investors has been migrating to the “everyday low prices” of index funds. While these funds often (but not always) offer much lower prices than actively managed funds, just like at Walmart, you don’t always get great stuff and you certainly don’t get much, if any, service to help you out. For very basic stuff this can be fine. For more complicated or high-value stuff it can end up costing more in the long run.
In an investment landscape dominated by monetary policy, investing can seem like pretty “simple stuff”. You just put money in the market and it goes up. Easy. One of the great disservices of such extreme policy, however, is that it artificially suppresses volatility and artificially inflates asset prices. In other words, it makes investing look a lot easier than it is, at least for a period of time. And that can effect the decision of where you shop.
Ben Hunt addressed this issue [here] when he stated: “Specifically, extraordinary monetary policy has obliterated the focal points of price discovery. When you no longer have Common Knowledge regarding the price of money, you don’t have Common Knowledge regarding the price of anything.”
This assessment, with which I agree, dispels any notion that the “market always knows best” or that investing is an easy, one dimensional decision. Those who believe that their wealth is better represented by numbers on their month end statements than by the value of the stream of cash flows represented by the underlying ownwership positions are setting up for a pretty big disappointment.
Nonetheless, the clear shortcomings of the hedge fund and passive approaches begs the question of why there hasn’t been a stronger movement to find better and more efficient versions of the active management model. After all, the flaws of active management that were revealed in the financial crisis had already been fairly clear for some time. Further, none of these flaws are inherent to the practice of active management, but rather reflect the business choices that many, but not all, active managers make.
Across many parts of the economy consumers are leveraging information and connectedness to become better consumers. As they become better informed, they are also demanding better value. While the field of investment services has been rather immune to these trends, it is ripe for change. Sooner or later, investors are going to demand better overall value from providers and Areté is here to provide just that.
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager
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