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  1. Monday, August 8th, 2016
    changing classifications

    In most of our endeavors, we seek to avoid ambiguity and are quick to classify people, places, things, whatever.  Those classifications make it easier for us to think in a shorthand way, taking some of the complexity out of the complex nature of everyday life (even while adding in the real possibility of errors in miscategorization).

    Of course, investors are champions at this activity, breaking down our holdings into asset classes and style boxes and buckets of this and that.  It all seems so precise and definite, but it really isn’t.  There are lots of gray areas made to look like black and white — and the lines are drawn looking backwards rather than forwards.

    Today’s classifications are soon to be out of date and, truth be told, the best money is often made by moving across the existing lines and into new territory, which is an anathema for those who like to plot out the landscape according to the current map and have carefully prescribed percentages of assets ... continues

  2. Thursday, July 14th, 2016
    high conviction

    Every industry has its lingo, its jargon, and its favorite phrases.  In the investment world, you can see that in spades, even though the words sometimes don’t enlighten as you would expect.

    For example, think of the terms that have come to be used to label an asset category — like “hedge funds” or “smart beta” — without really describing the category accurately at all.  If you need air quotes and repeated clarifications when using the terms, perhaps we could come up with something better, but those ones have stuck.

    Language is a function of the culture that spawns it, so it’s interesting to watch it develop over time and to see what phrases become an inescapable part of the dialogue (even as they become relatively meaningless through repetition and sloppy application).  Today’s example:  “high conviction.”

    If you read the materials of organizations that are involved in investment manager selection, you can’t ... continues

  3. Wednesday, June 15th, 2016
    programmed or nonprogrammed

    I came across a handout from an information systems class that I took more than forty years ago.  The front page had a grid that was based upon the work of  Nobel laureate Herbert Simon from 1960.  Here it is:simon_figure

    As I looked at it, I started to think about investment decision making.  Using this grid, are investment decisions programmed or nonprogrammed?  Are they more often “routine and repetitive” or “one-shot, ill-structured, and novel”?  There are different camps of belief.  For example, someone who believes in indexation has chosen to own “the market” today, tomorrow, and forever.  That’s as straightforward and programmed as it gets.

    But the categorization as presented primarily made me ponder the boundaries of quantitative investment management (programmed) versus fundamental management (nonprogrammed).  Quantitative approaches have been around a long time — thirty years ago there were simple versions of much of what is ... continues

  4. Tuesday, May 24th, 2016
    a best practice for funds

    “One of the great legal fictions of Wall Street is that mutual funds are independent of the companies that create and run them.”  So said Floyd Norris at the top of a 2010 column.New York Times | The article concerns a court case regarding Janus and the mutual fund trading scandal earlier this century.

    “Is Your Fund’s Board Watching Out for You?” was the title of an article a couple of years later in the Wall Street Journal.Wall Street Journal | The piece looks at the poor performance of Charles Schwab’s YieldPlus bond fund during the financial crisis to talk about some of the issues regarding mutual fund governance.

    Whenever mutual funds run into trouble of one kind or another, questions about the responsibilities of mutual fund boards come to the fore.  Just in the last few months, developments at Sequoia Fund and Third Avenue Focused Credit Fund have drawn attention to them once more.

    I have some thoughts about the responsibilities of those ... continues

  5. Sunday, April 17th, 2016
    starting somewhere

    “You have to start somewhere.”

    I hear that quite a lot when I ask why those trying to select managers begin with some kind of a performance screen.

    In fact, if you read the materials of firms who are in the business of selecting managers, you’ll often see similar statements.  For example, from Litman Gregory:  “We have to start somewhere and so, like everyone else, we often begin by screening for funds with compelling long-term track records.”Litman Gregory | The article is titled, “How We Seek to Identify Great Active Managers.”

    “Like everyone else.”  Yes, it is the place where almost everyone starts.  At least “long-term” was in there with italicized emphasis; that is a bit more defensible, but only modestly so.  Another pieceLitman Gregory | This is a more step-by-step overview of the firm’s approach. from the same firm contained this warning, also in italics, “The problem is that past performance is ... continues