The most persistent challenge I have faced has been figuring out how best to serve investors in an environment in which the Fed (and other central banks) implement monetary policy with such zeal as to almost eradicate any perception of risk in markets.
For as long as such policies continue to succeed, the best thing to do, arguably, is simply ride the wave of monetary support through passive funds. The only problem, and it's a big one, is that there is no effective way to determine when investors will finally lose faith in central banks. For most investors, unfortunately, the cost of being wrong is extremely high.
This challenge was put into even starker contrast after I read David Kidder's book, New to Big. Kidder's purpose with the book is to describe how large corporations can vastly improve innovation efforts by instilling different practices and habits.
In doing so, he works from the same kind of customer-centric approach that I used in establishing Areté. He asks, "Who experiences the problem acutely enough to seek a solution?" He goes on to describe the types of new business opportunities with the most potential: "Successful solutions solve a problem that is big, painful, and persistent: a repeated behavior or constant need that customers wrestle with on an ongoing basis."
By contrast, he also describes what those big opportunities are not: "And the solution cannot be a vitamin, something that is nice to have and that you might even buy once, but that, on a day to day basis, probably sits unused at the back of the shelf. It must be a painkiller, something you ensure is always in stock and easily accessible because it solves your immediate need, effectively and consistently."
In today's investment environment, after a year in which every single asset class was up, there was no acute pain to be felt. This is exactly the business challenge that loose monetary policy has created: It has alleviated the short-term pain of losses and volatility so much that very few people experience enough pain for which to seek a solution. Research and risk management are currently solutions without a problem.
None of this is to say that there will not be severe pain felt at some point in the future, and I strongly suspect that will be the case. But this really highlights the challenge monetary policy has created for investment services. It has changed the pattern of investment pain, which used to be felt regularly to some degree, to a pattern in which investment pain is virtually imperceptible for long periods of time, but then extremely severe periodically.
In addition to distorting markets in many ways, then, monetary policy has also distorted the pattern of demand for investment services. What used to be a persistent, ongoing, need to manage risk and interpret signals has now become a need to ride the wave of policy-induced market appreciation while it lasts and then, somehow, miraculously sidestep the inevitable and disastrous fallout.
This pattern diminishes the business value of investment research in many ways. For one, the ongoing insights and analyses of investment research (such as security selection and asset allocation) have little value during intervening periods. The predominant market risk factor is not related to economic fundamentals but rather to monetary policy.
The value of investment research is also diminished because it becomes realized only after periods that are many years apart. This creates an extremely risky business model because its value is not regularly visible and as such, can appear to be wholly unnecessary insurance.
Two silver linings exist in this otherwise dismal landscape, though. One is that many skilled and experienced analysts are leaving the industry for greener pastures. Legendary money managers are closing shop. The net effect is that the amount of competition is rapidly declining. If, and when, the market environment deteriorates, there will be precious few providers with the skill and credibility to analyze companies and industries again. This is part of what keeps me going.
Another silver lining is that the benefits of investment research extend well beyond the boundaries of active money management. Industry research and competitive analysis provides insights into other companies whether they be public or private. Technology trends transcend companies and industries. Virtually all research provides valuable grass roots evidence on economic activity. Historical analyses provide valuable context for what is possible and what is extremely unlikely. All of these things can be brought to bear on a wide variety of challenges related to, or completely unrelated to, money management.
Indeed, this is exactly the thinking I used when I established the Personal CIO service a few years ago. What I am doing now is reviewing much of the work that I do on a daily and weekly basis that does not make it into portfolio decisions. I am looking for projects and/or theses that I use in establishing my own strategic perspective of the markets that I can package in a way that can also be useful to others - and useful regardless of what markets are doing.
I see this as a sensible extension of my work for a couple of reasons. One is that I always have a huge number of research projects in process so I have no concerns about generating sufficient content. Another is that even with the emergence of what I call alternative research organizations that have vastly improved access to high quality, unconflicted research, there is still a struggle to understand exactly what those insights mean. In other words, there are still a lot of people who need a painkiller.
Finally, several different data points suggest that many investors are eyeing the remarkable market advances with deep suspicion. The outflow of money from equity mutual funds is one indication of this. I have also heard a fair amount of anecdotal evidence that a lot of individual investors do not buy into the rosy market forecasts. In short, many investors who are accountable for their own retirement are worried - and, I believe - rightly so. Areté is here to serve them.
As I review and formalize research content with the intent of making it more widely available, I do so with the same intent I have always had - to help investors invest better. If you have any comments or suggestions as to how I can better accomplish that goal, please let me know. Thanks!
David Robertson, CFA
CEO, Portfolio Manager