Last week Jeremy Grantham put out a piece on investment bubbles that also contained a good bit of wisdom about the investment business. He described:
“Most of the time in more normal markets you show up for work and do your job. Ho hum. And then, once in a long while, the market spirals away from fair value and reality. Fortunes are made and lost in a hurry and investment advisors have a rare chance to really justify their existence. But, as usual, there is no free lunch. These opportunities to be useful come loaded with career risk.”
These comments provide excellent context for the opportunities and challenges confronting Areté. When I formed Areté in 2008 I felt strongly that investors deserved something better from advisors than just "showing up for work". When the financial crisis followed shortly thereafter, I was actually somewhat encouraged that investors would be angry enough to demand something better.
It turns out I was only partly right. Investors were angry but they only demanded something very modestly better - passive funds. As such, most investors had the same basic relationship with the market: Just be there.
This solidified a terrible bias in the industry: Always be turned "on", i.e., always be fully exposed to the market. Certainly the strong performance of stocks has reinforced that belief. Importantly, however, the last thirty-eight years stand out in history as being an incredible outlier. Nothing in global financial history justifies such a dogmatic position.
This state of affairs raises two interesting points. One is that with such uniform belief in stocks, and with "the market spiraling away from fair value and reality", the time is approaching in which fortunes are likely to be lost. The other point, however, is the contrarian effort to avoid fortunes being lost is still "loaded with career risk". While I think the opportunity to make a contrarian call and to have a lot of cash ready to redeploy at better prices is historic right now, I have thought that opportunity to be attractive for several years now.
This situation presents three major challenges/issues for Areté as I see it. The first is to be prepared if/when there are major market disruptions, which I suspect there will be. Major selloffs in late 2018 and again in early 2020 suggest simmering instability.
Further, it is almost impossible to have the kind of speculative behavior currently transpiring in markets and not have it leak into illiquid assets. This is the same basic problem that occurred in the financial crisis in 2008 and is likely to occur again next time around, albeit probably with different assets. I want to be ready to pick up the pieces.
Also, I am seriously considering expanding the mandate for portfolio management from just stocks to also include index funds and exchange-trade funds (ETFs). In considering such a move, I do not want to significantly change the objective of the Arete midcap strategy which is to invest in a portfolio of securities that in aggregate have the best chance of generating attractive long-term returns. Rather, the goal of the modification would be to use such funds as a complement to the core stock strategy in order to better manage exposure to various macro trends.
Finally, given the long wait for stocks to become attractively valued and therefore to improve the prospects for the money management operation, I continue to explore other ways to generate revenue. Mainly I want to leverage the knowledge base from my 30+ years of investment experience and ongoing research. The Observations letter is one way to do that.
The challenge, and I've got to admit this is frustrating, is that knowledge and research are not working in the market right now and haven't been for a long time. I think that has to change, but for the time being I will be trying to find the pockets of investors who still appreciate those efforts.
As always, thanks for your support!
David Robertson, CFA
CEO, Portfolio Manager