| Arete Quarterly Q110 |
Welcome
“Who is Atticus Finch?”
In this time of deep-seated distrust of institutions, the question reflects back to when things were perhaps simpler, when human interaction was perhaps more meaningful, but when there was also tremendous uncertainty and potential for conflict.
The character of Atticus Finch is the father in Harper Lee’s novel, “To Kill a Mockingbird” which was famously played by Gregory Peck in the 1962 movie. Despite numerous challenges through the story, Atticus consistently steps up to do what is right, often despite imminent danger. The character of Atticus serves as such a powerful image of ethics and fiduciary duty that we seriously considered naming the company Atticus in order to represent one of our most important ideals.
The character of Atticus illustrates so clearly what it means to be a fiduciary. Part of being a fiduciary is that there is no one thing or act that is sufficient. Rather, it requires a guiding ethic, a personal disposition, to serve the interests of others.
Fiduciary duty is about far more than following a law. It is about standing up for those you represent when times are tough. It is about fighting the right fights on behalf of a client. It is about exercising expertise for the benefit of others. We hope the investment community has not forgotten about Atticus Finch.
The question, “Who is Atticus Finch?” is also a reference to another literary character — that of John Galt, the main character in Ayn Rand’s epic novel, Atlas Shrugged. The novel is largely a celebration of individual achievement, but also serves as a manifesto of enlightened self-interest. While Rand’s themes and imagery are dramatic, she raises fair questions.
The novel contrasts the “good” of individual ability with the “evil” of societal exploitation of that ability. In the story, John Galt and an elite subset of high achievers eventually tire of being repeatedly penalized for their accomplishments. In response, they go on “strike” by disappearing from society altogether and creating an independent community guided by the code of enlightened self-interest. The new arrangement produces a culture which is fairer, more productive, and more ethical.
Just as the question, “Who is John Galt?” represents the mysterious disappearance of the ablest members of society, the question, “Who is Atticus Finch?” represents a similar risk to those who exercise the highest ethical standards. If the Atticus Finches of the world, the paragons of stewardship, aren’t only not appreciated by society, but often punished by it, they too may gradually choose to “disappear” some day. We do have concerns that the proliferation of moral hazard increases the risk of a widespread “strike”.
All the things we do at Arete are aimed at providing the highest standards of stewardship. We present performance based on the institutional GIPS standards, we vote our own proxies in order to voice our concerns to directors and to enhance our research process, we offer separate accounts to ensure the security and transparency of investors’ funds, and we use independent custodians and brokers to structurally eliminate conflicts of interest.
We do all of this in addition to running a sound investment process that is designed to create value by outperforming its benchmark. We enjoy doing it, and sincerely hope you appreciate the effort.
“Who is Atticus Finch?”
In this time of deep-seated distrust of institutions, the question reflects back to when things were perhaps simpler, when human interaction was perhaps more meaningful, but when there was also tremendous uncertainty and potential for conflict.
The character of Atticus Finch is the father in Harper Lee’s novel, “To Kill a Mockingbird” which was famously played by Gregory Peck in the 1962 movie. Despite numerous challenges through the story, Atticus consistently steps up to do what is right, often despite imminent danger. The character of Atticus serves as such a powerful image of ethics and fiduciary duty that we seriously considered naming the company Atticus in order to represent one of our most important ideals.
The character of Atticus illustrates so clearly what it means to be a fiduciary. Part of being a fiduciary is that there is no one thing or act that is sufficient. Rather, it requires a guiding ethic, a personal disposition, to serve the interests of others.
Fiduciary duty is about far more than following a law. It is about standing up for those you represent when times are tough. It is about fighting the right fights on behalf of a client. It is about exercising expertise for the benefit of others. We hope the investment community has not forgotten about Atticus Finch.
The question, “Who is Atticus Finch?” is also a reference to another literary character — that of John Galt, the main character in Ayn Rand’s epic novel, Atlas Shrugged. The novel is largely a celebration of individual achievement, but also serves as a manifesto of enlightened self-interest. While Rand’s themes and imagery are dramatic, she raises fair questions.
The novel contrasts the “good” of individual ability with the “evil” of societal exploitation of that ability. In the story, John Galt and an elite subset of high achievers eventually tire of being repeatedly penalized for their accomplishments. In response, they go on “strike” by disappearing from society altogether and creating an independent community guided by the code of enlightened self-interest. The new arrangement produces a culture which is fairer, more productive, and more ethical.
Just as the question, “Who is John Galt?” represents the mysterious disappearance of the ablest members of society, the question, “Who is Atticus Finch?” represents a similar risk to those who exercise the highest ethical standards. If the Atticus Finches of the world, the paragons of stewardship, aren’t only not appreciated by society, but often punished by it, they too may gradually choose to “disappear” some day. We do have concerns that the proliferation of moral hazard increases the risk of a widespread “strike”.
All the things we do at Arete are aimed at providing the highest standards of stewardship. We present performance based on the institutional GIPS standards, we vote our own proxies in order to voice our concerns to directors and to enhance our research process, we offer separate accounts to ensure the security and transparency of investors’ funds, and we use independent custodians and brokers to structurally eliminate conflicts of interest.
We do all of this in addition to running a sound investment process that is designed to create value by outperforming its benchmark. We enjoy doing it, and sincerely hope you appreciate the effort.
Business Update
Spring has sprung, market sentiment is thawing and we are all looking forward to sunnier days. There is no doubt that with signs of a healthier market, I have seen increased interest in Arete’s services. While the market has helped, Arete now has twenty months and a full calendar year of composite performance. This track record also includes strong performance by mid cap stocks and outperformance of the Russell Midcap Index by Arete’s mid cap core composite (See the performance presentation on p. 9).
While the recession and market downturn certainly had the obvious impact of reducing wealth for many, I believe the more subtle, but more important effect, was the fundamental re-evaluation of investment programs by individuals and institutions alike.
At the top of the priority list was ensuring adequate liquidity which many addressed last year. Next on the list was an evaluation of risk. Most of us have not experienced the widespread breakdown of financial markets and confidence that we saw in 2008-2009. Many relied on personal experience to frame their expectations for the markets and had no even remotely similar experience. Even those of us who have studied the equity markets in depth, and knew cognitively that big declines were possible, were shocked by the firsthand experience.
When I look across the market of institutional investors, I have to admit that I am fascinated by the extreme reactions to the downturn. One approach for some plans has been to take a step back to assess the goal of the plan — which is to meet liabilities, and to narrowly focus on that objective. As such, I have seen an increase in asset-liability matching which may not be not be as exciting, but absolutely fulfills the mission.
Another common response has been what appears to be the exact opposite reaction: ratcheting up risk exposure. I think the logic is that with a certain amount of wealth destroyed by the market downturn, but with liabilities remaining the same, the only way to make ends meet is to go for broke. Interesting, but dangerous.
I have also seen a huge proportion of searches for emerging markets managers and alternative products. There are many potential reasons for such activity, but I fear much of it may be driven by the “go for broke” mentality. Regardless, for the time being, searches right now seem to be heavily weighted on opposite ends of the risk spectrum and noticeably light for traditional, active US managers.
I have shared my views — with almost anyone who will listen — that mid cap stocks are in a “sweet spot” for investing. They are big enough to have survived their growing pains, but small enough to have very meaningful growth opportunities. In addition, I have talked a great deal about the terrific exposure to higher growth international markets many of these companies have. While investors may not be focusing on mid caps today, they won’t be able to ignore the opportunities forever.
I believe very strongly in sharing my views — partly as a matter of transparency — and partly as a matter of sharing ideas of value. I always enjoy hearing other views that challenge or complement my own and heartily encourage you to contact me if there is anything you would like to discuss.
Thanks and take care!
David Robertson, CFA
CEO, Portfolio Manager
Spring has sprung, market sentiment is thawing and we are all looking forward to sunnier days. There is no doubt that with signs of a healthier market, I have seen increased interest in Arete’s services. While the market has helped, Arete now has twenty months and a full calendar year of composite performance. This track record also includes strong performance by mid cap stocks and outperformance of the Russell Midcap Index by Arete’s mid cap core composite (See the performance presentation on p. 9).
While the recession and market downturn certainly had the obvious impact of reducing wealth for many, I believe the more subtle, but more important effect, was the fundamental re-evaluation of investment programs by individuals and institutions alike.
At the top of the priority list was ensuring adequate liquidity which many addressed last year. Next on the list was an evaluation of risk. Most of us have not experienced the widespread breakdown of financial markets and confidence that we saw in 2008-2009. Many relied on personal experience to frame their expectations for the markets and had no even remotely similar experience. Even those of us who have studied the equity markets in depth, and knew cognitively that big declines were possible, were shocked by the firsthand experience.
When I look across the market of institutional investors, I have to admit that I am fascinated by the extreme reactions to the downturn. One approach for some plans has been to take a step back to assess the goal of the plan — which is to meet liabilities, and to narrowly focus on that objective. As such, I have seen an increase in asset-liability matching which may not be not be as exciting, but absolutely fulfills the mission.
Another common response has been what appears to be the exact opposite reaction: ratcheting up risk exposure. I think the logic is that with a certain amount of wealth destroyed by the market downturn, but with liabilities remaining the same, the only way to make ends meet is to go for broke. Interesting, but dangerous.
I have also seen a huge proportion of searches for emerging markets managers and alternative products. There are many potential reasons for such activity, but I fear much of it may be driven by the “go for broke” mentality. Regardless, for the time being, searches right now seem to be heavily weighted on opposite ends of the risk spectrum and noticeably light for traditional, active US managers.
I have shared my views — with almost anyone who will listen — that mid cap stocks are in a “sweet spot” for investing. They are big enough to have survived their growing pains, but small enough to have very meaningful growth opportunities. In addition, I have talked a great deal about the terrific exposure to higher growth international markets many of these companies have. While investors may not be focusing on mid caps today, they won’t be able to ignore the opportunities forever.
I believe very strongly in sharing my views — partly as a matter of transparency — and partly as a matter of sharing ideas of value. I always enjoy hearing other views that challenge or complement my own and heartily encourage you to contact me if there is anything you would like to discuss.
Thanks and take care!
David Robertson, CFA
CEO, Portfolio Manager
Market Overview
Market returns in the first quarter were surprisingly strong, building momentum through the quarter. At the same time, the market’s “fear gauge,” the VIX indicator of market volatility, took another step down to levels not seen since May 2008 — and levels lower than those when the S&P 500 peaked in October 2007.
Perhaps the most significant event for the market in the quarter was the completion of the health care reform bill. While there continue to be many dissenting voices as to the merits of the bill, at least with its completion, a great deal of uncertainty was eliminated. Now, companies and investors alike can analyze the bill and begin adapting to the new landscape.
In general, the market has been continuing to climb the proverbial “wall of worry” and nowhere has this been more apparent than among the banks. While mid cap banks were the dregs of the investment universe last year, this year they are the star performers. Certainly improving conditions in residential housing have helped as has the Fed’s continued commitment to keep rates low. For those banks that don’t go out of business, there will be an accommodating yield curve and diminishing competition for the foreseeable future.
We continue to watch the market’s rise with some wariness. While we do not consider valuations to be incredibly high, they are clearly less compelling than three months ago. More importantly, while conditions are improving in the US, we are concerned about the complacency the market has exhibited toward a rather large number of risks.
Some of the bigger risks to the global economy include the problems with sovereign debt in Greece and the threat it poses to the entire Eurozone, the Fed’s termination of MBS purchases, the high level of US debt, the increasing amount of protectionist rhetoric, continued terrorist threats across the globe, unresolved global economic imbalances, an overheating Chinese economy, and uncertain financial regulation.
Despite, or perhaps because of these risks, our affinity to US stocks has not waned. A couple of weeks ago, we had the pleasure of listening to Russell Napier, author of Anatomy of the Bear and one of the pre-eminent commentators on global equity markets. Mr. Napier called US stocks, “terrific global assets” and also indicated that several European investment trusts are significantly underweight US stocks, suggesting an important source of future demand. In sum, we are encouraged by Mr. Napier’s analysis and especially so given his international perspective.
Market returns in the first quarter were surprisingly strong, building momentum through the quarter. At the same time, the market’s “fear gauge,” the VIX indicator of market volatility, took another step down to levels not seen since May 2008 — and levels lower than those when the S&P 500 peaked in October 2007.
Perhaps the most significant event for the market in the quarter was the completion of the health care reform bill. While there continue to be many dissenting voices as to the merits of the bill, at least with its completion, a great deal of uncertainty was eliminated. Now, companies and investors alike can analyze the bill and begin adapting to the new landscape.
In general, the market has been continuing to climb the proverbial “wall of worry” and nowhere has this been more apparent than among the banks. While mid cap banks were the dregs of the investment universe last year, this year they are the star performers. Certainly improving conditions in residential housing have helped as has the Fed’s continued commitment to keep rates low. For those banks that don’t go out of business, there will be an accommodating yield curve and diminishing competition for the foreseeable future.
We continue to watch the market’s rise with some wariness. While we do not consider valuations to be incredibly high, they are clearly less compelling than three months ago. More importantly, while conditions are improving in the US, we are concerned about the complacency the market has exhibited toward a rather large number of risks.
Some of the bigger risks to the global economy include the problems with sovereign debt in Greece and the threat it poses to the entire Eurozone, the Fed’s termination of MBS purchases, the high level of US debt, the increasing amount of protectionist rhetoric, continued terrorist threats across the globe, unresolved global economic imbalances, an overheating Chinese economy, and uncertain financial regulation.
Despite, or perhaps because of these risks, our affinity to US stocks has not waned. A couple of weeks ago, we had the pleasure of listening to Russell Napier, author of Anatomy of the Bear and one of the pre-eminent commentators on global equity markets. Mr. Napier called US stocks, “terrific global assets” and also indicated that several European investment trusts are significantly underweight US stocks, suggesting an important source of future demand. In sum, we are encouraged by Mr. Napier’s analysis and especially so given his international perspective.
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