One of the things I have come to realize over the last several years is how much my view of Areté has evolved. I started with the notion of creating a high quality money management effort and while I still absolutely maintain that objective, in hindsight it seems so limiting. An important part of my change in views has resulted from an extended period of extremely difficult conditions for active management.
To people outside of the investment industry and to those who do not have consistent access to in-depth research, talk of “extremely difficult conditions” may sound more like sour grapes than an objective assessment of the investment landscape.
But Areté is certainly not the only firm that has been affected by such adverse conditions. As I have reported several times, many of the smartest and most talented hedge funds managers have closed shop due to the low return on excellent research.
Further, Rusty Guinn of Epsilon Theory dared to articulate one of the “dirty little secrets” that has emerged in the industry [here]: “Pursuing better returns by uncovering absolute truths about the companies and governments we invest in is not a serious enterprise in the face of markets rife with Narrative abstractions. It is a smiley-faced lie, a right-sounding idea that doesn’t work, and which we know doesn’t work.”
In other words, it’s pretty clear to anyone paying attention, that the traditional practice of conducting in-depth research in order to reveal underappreciated stocks and to better manage risk doesn’t work in a world awash in liquidity from central banks. This comports well with my assessment from last quarter in which I noted, “Such policies [i.e., persistently loose monetary policy] almost completely undermine the value of ongoing analysis and risk management.”
This unfortunate reality has weighed heavily on me the last few years. As a conscientious money manager you have to accept that many of the skills you have developed and much of the knowledge you have worked hard to gain and much of the experience you have attained just “doesn’t work” in this environment. So you need to figure something else out.
To be sure, I have not given up on the possibility that active management will once again have its day in the sun. For one, there are indications that conditions are improving for active management most conspicuously in the form of significantly increased volatility in the first quarter. In addition, I’m ready to go if that does pan out since I’ve got the valuation model in very good working shape. There are certainly all kinds of mispricings that can’t persist forever.
In the event that some degree of “normalcy” does not return to markets in the not-too-distant future, however, it is only prudent to consider other options. In fact, I started doing that some time ago by conceiving the personal Chief Investment Officer service. Indeed, as investing continues to become more important, it is also becoming more difficult. As such, there are all kinds of ways in which “good research, independent thinking, and putting clients’ interests first” can provide valuable services outside of just money management.
Further, as I continue to share my thoughts on the exercise of investing, navigating the investment environment, and navigating the panoply of investment services through the Areté blog, I have been extremely encouraged by the numerous and diverse indications of interest in what Areté does.
For example, with each blog post I almost always gain additional followers on various distribution platforms. I often get comments, thank yous, phone calls and other forms of engagement with my writings. I get notes informing me of typos or minor editorial errors which tells me that readers are not just paying attention, but also trying to help out. In addition, the posts are regularly highlighted on platforms such as Advisor Perspectives and several posts now have been included in the morning email from Financial Advisor IQ which goes out to 65,000 financial advisors.
While all of these responses are encouraging, they are especially so given how small Areté is and given that I spend virtually nothing on marketing. Of course I’m sure there is an element that a number of people are simply recognizing that they are getting really valuable investment insights for free, but nonetheless, I think it is fair to say that my message is getting out there and that people care about it.
This phenomenon of substantial outside interest dovetails with a related phenomenon. Over the last ten years or so (i.e., since the financial crisis) I have seen a number of what I’ll call “alternative” research sources emerge. The common threads running through all of these efforts are affordability, high quality, independence, and above all, a sincere interest in helping investors.
A similar movement has also occurred among service providers such as money managers and financial advisers and other industry participants such as journalists. Participants from every reach of the industry are increasingly recognizing the need to do things differently and are offering suggestions or actually experimenting with new ideas.
While this group still constitutes a small minority of industry participants, it is a significant number and is growing. It coalesces around similar values and philosophical beliefs. The unifying message seems to be, “We recognize the highly conflicted position of Wall Street and did not get into this business simply to enrich ourselves. We want to do something better.” In other words, on both the client and provider side, many of us are joined in wanting the investment business to work better.
All of this suggests that there may now be enough critical mass of support for these efforts to take hold in a meaningful way. As a result, I will be focusing more of my efforts on finding ways to connect and collaborate in order to build a new and better investment services industry.
If you have any suggestions for me or know of someone I should get in contact with, please let me know. I strongly suspect there is a lot of potential in brainstorming and leveraging resources. Let’s see what we might be able to accomplish together!
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager