Russell Clark ($) described in a recent Substack post, “Fund management is about two different things - making money and raising money.” While he is mainly talking about the hedge fund business, the statement still provides useful perspective from which to assess other investment propositions.
The “raising money” part essentially boils down to solving an investment problem for a certain group of investors. In the hedge fund world this can include strategies like short selling, various arbitrage strategies, and carry trading. Each of these can help diversify large portfolios and can also provide their own return streams.
The proposition for individual investors has always been far more pedestrian. Way back in the day, brokers simply provided access to financial assets. Since then, discount brokers, internet trading, and mobile apps have simply advanced the same basic proposition: improving access.
On the product side, mutual funds provided access to professional managers and the potential for better diversification, but costs tended to be high and performance unexceptional. Since then, index funds have helped trim excess costs, but have done nothing to help on performance.
The disproportionate focus on “raising money” vs. “making money” for retail investment services is often under-appreciated because performance hasn’t mattered much for the last forty-some years. Healthy global growth and declining interest rates ensured all financial assets did exceptionally well. Success was not so much a function of outperforming as simply being there.
I bring all this up because I think this is about to change in a pretty significant way. Now that the seeds of inflation are planted, the Fed has a lot less flexibility to maintain “super-abundant” reserves. Less liquidity – and less tailwind for stocks. Given extremely high valuations, stocks have a long way to fall before looking cheap.
In addition, the vast majority of financial assets are highly correlated with stocks. That means not only is the return on stocks likely to be much lower in future years, but it won’t be easy to find truly diversifying return streams either.
So, I think investors are right on the threshold of having a big investment problem to solve: How do you generate decent returns and establish effective diversification in an environment where nearly all the winds are blowing in your face?
The answer isn’t that hard in a sense; it involves doing something very different than what got you to this place. More specifically, it involves recognizing all the flaws in the standard 60/40 approach and correcting for them. For one, it involves a more selective approach to stocks that mitigates the valuation risk of major indexes. It also addresses the risk inflation poses to fixed income investments. Finally, it reaches beyond conventional asset classes to incorporate truly diversifying assets. In short, it involves all the things I have done in developing the All-Terrain strategy.
I am increasingly convinced that the main investment problem for most investors is going to be “making money”, i.e., generating sufficient returns. Simple access to risk exposure ain’t gonna cut it any more. As the problem of lower returns becomes increasingly evident, I expect my proposition to become much more appealing. Or, as Clark puts it, “the investment case is also the business case”.
I expect the appeal to be broad-based. It will be appealing to older investors who have done well with their investments but are nervous about losing what they have accumulated. It will be appealing to people who are still working but have only a tenuous hold on funding their retirement. It will also be appealing to younger investors who have been alienated by a financial system and a financial services industry that doesn’t work for them. Moreover, this will be especially appealing to do-it-yourselfers who discover investing is a lot harder than they thought.
I expect the transition to a more difficult investment environment to transpire over years and quite possibly decades. As result, there should be some really nice tailwinds for Areté’s business.
If you have any questions about what I do or just want to learn more about the All-Terrain strategy, please reach me at firstname.lastname@example.org. I look forward to it!
Thanks for your support!
David Robertson, CFA
CEO and founder, Areté Asset Management