The Chartered Alternative Investment Association (CAIA) wrote an intriguing piece on the Portfolio for the Future, including 5 specific characteristics >>
- Private capital
- Fiduciary responsibility
- Actively engaged / Universal Owner
- Operational alpha
Let’s break down some of the key points in each of these areas, along with my thoughts:
- Diversification – kind of clear but bears repeating
2. Private markets
The point here is private markets as a core allocation in a world where most wealth creation is happening in private markets.
The thesis here is that allocation to private markets is necessary simply to capture the market portfolio. This is quite a shift from the usual rationale for private markets as a diversifier, source of outperformance or as an alternative. It is true that the number of public companines has fallen radically since the 1960’s, and many companies are going public far later at valuations far higher than in the past, meaning much wealth creation has already taken place. Just compare the IPO valuations of say Airbnb or Snowflake with Amazon (c$400m in 1997) or even Google.
John makes the point that public/private delineation maybe becomes less important and funds crossing over that boundary may be more relevant. I’m intrigued by the idea of crossover funds (think, Sequoia, Tiger Global, Coatue etc) and you can see why this potentially makes sense. I think Baillie Gifford have talked about doing a bit of this on some podcasts but of course so did Neil Woodford and that didn’t end so well for his investors.
So the crossover thing may well make sense but there are traps for sure.
Advisers and asset managers are definitely guilty of putting the investment world into “buckets” which don’t always make total sense, and then the buckets themselves can distort the way markets operate. But there are also legitimate practical challenges: the skill sets, knowledge and expertise across private and public can be quite different.
And if we are viewing private markets as a “beta” allocation to capture part of the market portfolio we need to worry a lot more about fees. Value-add fee models of say 1% +15% performance aren’t consistent with a beta play, fees would have to align.
3. Fiduciary responsiblity
One of my bugbears with the investment industry is it is incresaingly a fund packaging and distribution industry with a chronic lack of deep independent thinkers really acting on behalf of the investors they serve. I think this pillar sets an ambition on this.
I always think that when you hear Warren Buffet speak about his shareholders’ investments in Berkshire Hathaway (and there’s a lot you can criticise Buffet for, including his views on ESG, but I think on this point he’s solid) just the way he talks about the assets and the portfolio it’s like they are his and you’re joint partners in an endevour, whereas many portfolio managers can sound like technocrats and it’s just another portfolio they are paid to sit infront of and fiddle with. It shouldn’t be like that.
This isn’t a legal point, or really an investment point but a mindset point.
One practical idea on this theme was permanent capital as an alternative to closed-ended, fixed life funds. I love this idea as it’s fundamentally just better aligned with investors and I think investors far too often give away closed end liquidity just because that’s what’s standard for the asset class. That then leads to a whole load of misalignment on time scales not to mention fun and games with gaming the IRR numbers. I would love to see the idea of permanent capital structures get more airtime. Maybe there is some promising signs with the Long Term Asset Fund (LTAF) in the UK.
4. Universal Ownership
I wrote about this as an idea whose time had come way back in 2019 so I couldn’t agree more. When you step back a little bit attitudes have actually shifted amazingly fast on this, by asset owners and now increasingly by asset managers as well.
The idea is that universal owners own a representative slice of the economy and so are as interested in systemic risks and proper market functioning as they are in the individual security level risks of each of their holdings. But in the past the latter got all the focus, so this sort of approach seeks to redress the balance.
One pathway for this to happen is through stewardship and engagement. In public markets this look like proxy voting, where we’ve seen more focus and need to see far more, but the concept is very relevant across private markets too where there is less data and transparency but potentially more influence and additionality.
I think managers are still paying lip-service to this idea in many cases and waiting for clients to push them, there is room for more progressive stances.
5. Operational alpha, including: “Culture eats sharpe ratio for breakfast” (what a quote!) and other such ideas which really matter but don’t seem on the face of it to relate directly to stock performance. Analytical skills, knowledge and access are stock-standard now and as an asset management firm you need to do far more to stand out.
Purpose and culture are at the heart of this really as the asset management industry catches up a little with the broader corporate zietgeist, and recognises that these things actually matter for investment outcomes too. But again, we far too often see lip service from managers. If I had £1 for every slide on “our culture as our greatest asset” then I’d … well … you know. C’mon, be better. There needs to be far more authenticity on this and owned from the top down rather than outsourced to the people or marketing functions.
Lots to reflect on!
We asked John what single thing listeners should take away:
Alternatives. The future is a holistic portfolio that looks across public and private to deliver an outcome and doesn’t need to conform to specific buckets
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