Sunday, November 10, 2013

Mostly Positive Adjustments for Investors


In last week’s post I mentioned one of the slogans used in the US Marine Corps, “Adapt, Improvise, and Overcome.” As today, November 10th is the 238th birthday of The Corps, I was thinking of all the adjustments it has had to make to become the nation’s premier fighting force. Though The Corps can handle almost any mission assigned to it, much of the slogan has to do with overcoming the rigidities imposed within itself and the US Defense establishment. I wonder whether Pope Francis is using a similar approach as he tries to adjust the behavior of the Roman Catholic Church, which could have impacts on many other organized religions.

Less cosmically, while painful in some cases, we are seeing a number of current adjustments that are subtly or perhaps not so subtly adjusting investment thinking as outlined below.

Lessons from the Twitter IPO

Twitter with the help of its lead underwriter Goldman Sachs* had a successful launch of its IPO. While they did raise the price of the offering several times similar to Facebook, they did not adjust the number of shares being offered as Facebook did. The NYSE, the venue for the aftermarket, went through exacting trials under stressed conditions that NASDAQ* did not with Facebook. The President could have learned a lot from the Twitter launch and adjusted his attempts to re-launch a somewhat more successful Obamacare.

A possible lesson to be feared

In a syndicated column by George F. Will entitled “The Enigma of Janet Yellen,”  the author  was concerned that by past experience and training, Ms. Yellen has been amenable to penalize savers to benefit equity owners around the world. He fears that in the absence of fiscal policy leadership, monetary policy led by the Fed is going to in effect, become the conscience of the government, and lead to adjusting our social priorities through the use of various monetary devices. If Mr. Will’s concerns are realized, the rate of inflation will rise and the dollar may shrink.

Unwinding of the 4% rule.

For many years’ wealth managers within or outside of trust departments have believed that a 4% withdrawal rate during retirement was possible without destroying the capital base. Today, based on the current low interest rates, some careful advisors are more comfortable with 3%, and T. Rowe Price* believes 2.8% is more prudent. If these lower numbers are to be believed, spending and saving efforts will need to be adjusted. A similar exercise is needed for a number of endowment and foundation boards to contemplate.

Liberal Arts needs to be liberated

Currently a significant number of liberal arts colleges are facing declining enrollments, rising expenses and less than great returns on their too small endowments. Part of their problem is that often these organizations are governed with a high level of rigidity. Even in government, during periods of stress high-priced workers can be laid off. Granting tenure in higher education is often a one-way street, in that after being granted it, the tenured ones can stay employed as long as they want regardless of their productivity. 

One of the fields of study that should be examined by the payers of college tuitions is Macroeconomics. Robert Shiller, a 2013 Nobel laureate wrote a blog published by the Guardian entitled, “Is Economics a Science?”  He properly questions whether it is a science like Physics. He accurately says that the study of Economics has to do with policy. I suspect that is how this course is taught which could have some benefit to Political Science majors whose aim is the Presidency or slightly lower. On the other hand, Microeconomics introduces some techniques which could be useful to both consumers and producers. In my particular case the focus on price-setting with different degrees of inelastic supply and demand was useful in my business and investment career. What I am suggesting is that the rigidities found in much of the non-profit world need to go through serious adjustments and that will happen whether the occupants of the various ivory towers like it or not.

Investment thinking is being adjusted

All investment organizations are being caught in a pincer movement of lower investment returns in equity, debt, commodities, derivatives and cash concurrent with rising expenses for technology, compliance, marketing, and keeping their good people from going entrepreneurial either directly or to smaller shops, such as hedge funds. In this light it is interesting that Goldman Sachs* will no longer produce research that is based on “growth at a reasonable price.” This is a policy that worked well in the mutual fund business for many years. In his leadership days at Fidelity Magellan, Peter Lynch was a major proponent of this strategy. In Peter’s search for good investments he found a large number of companies who were growing, not with a high growth rate but who were selling at prices that did not presume a continuation of their growth rate.

How are we are adjusting?

The first thing I do is look under the hood of various labeled classifications to see the spread of options that have been grouped under a simple label like growth or large cap. While it is useful to know how a manager performs relative to his peers under varying conditions, markets are not two dimensional up vs. down, most of the time they are in some form of equilibrium. The more you study people, the more different they appear to be. This is why an All-Star team picking the best player for each position often does not do well against a team of good players that has played together benefitting from natural leadership within the group.

I am looking to add a new fund to our portfolios. My key concern is whether the fund being examined, which is in a particular market phase, will add or subtract to the results of the existing portfolio.

One of the adjustments that I am making as I move away from labels is to look for good, understandable managers in broad categories. That is why I now group equity managers for my purposes under the banner of “equity exposure.” Because of the dynamic changes in the world’s intellectual leadership, I expect that the rate of adjustments will accelerate. I need to pay attention to these changes as they creep over the various time horizons that we must accommodate.

How do you expect to adjust to the future? 
*Owned personally, by my private financial services fund, or both.
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