What we are working on this week
Evaluating Managers: A Data-Driven Approach
One of the standout sessions at the PCF StrategiesConference was the discussion on evaluating managers. The session featured GregDean and Claire Finn Levy, who explored the question of whether there is abetter way to judge managers beyond traditional methods such as past performanceor subjective interviews.
ClaireFinn Levy, an expert in coaching managers and analysing their investmentdecision-making, presented a data-driven approach to manager evaluation. Sheemphasized the importance of quantifiable metrics such as hit rate, decisionquality, and payout analysis. This approach allows for a more objectiveassessment of managers, providing valuable insights into their decision-makingabilities.
Whilethis data-driven approach is not entirely new, Claire's process offers a uniqueway to quantify and analyse manager performance. The availability of suchinformation could potentially revolutionize how we evaluate and select managersin the future. However, it's important to be cautious and recognize thelimitations of relying solely on statistical metrics. The introduction of theSharpe ratio had its drawbacks - insurance or relative strategies can haveoutstanding Sharpe ratios, especially if calculated with a limited data setthat doesn’t include the inevitable pay-out, drawdown, or ‘fat-tail event’.Fund managers often control the data and the experience/performance historybeing marketed can look very different from the experience a few years down theline. So far this looks like something that could help us cut the wheat from thechaff but it’s not yet clear how it can be used across a wide variety ofstrategies.
The Rise of Artificial Intelligence in Portfolio Construction
Artificial intelligence (AI) was another prominenttheme at the PCF Strategies Conference. While it didn't receive as muchattention as expected, the discussions shed light on the challenges andopportunities surrounding the implementation of AI in portfolio construction.
Wewere somewhat surprised at the difficulty people are having in grasping theconcept of AI and its practical application. In particular, were think thescepticism of many in the audience stems from a lack of differentiation.Between generative AI, such as GPT models, and extractive AI needs to be madeclear. Generative AI involves creating new content from very broad andunstructured data sources, while extractive AI focuses on extractinginformation from a narrow, trusted data set.
Thediscussions highlighted the need for a better understanding of how AI it can beeffectively utilized in research and advisers’ practices. We think we can helpadvisors with some of the early low-hanging fruit and will be arranging awebinar for our clients on this subject in the next few weeks.
Geopolitics: A Key Factor in Portfolio Decision-Making
Geopolitics also took centre stage at theconference, with Vikram Mansharamani providing some striking insights into theglobal landscape. One of the key topics discussed was the potential decline ofthe US dollar as the world's reserve currency. Mansharamani highlighted thegrowing pushback from various countries and proposed the idea of the BRICScountries coalescing around a jointly-backed currency, potentially tied to gold.
Whilethe feasibility of such a currency remains uncertain, the implications of sucha shift would be significant. It could impact the value of the US dollar, USTreasury yields, and various other aspects of the global economy. Thisthought-provoking idea opens up a new avenue for portfolio managers to considerwhen making investment decisions.
Private Assets: Exploring New Investment Avenues
Private assets, including private debt and privateequity, were also extensively discussed at the conference. Severalpresentations focused on the potential benefits and risks associated withinvesting in these alternative asset classes.
Privateequity, in particular, was a topic that sparked debate and prompted furtherinvestigation. While some presentations painted a rosy picture of the assetclass, others raised critical questions. This has spurred us to critically analysenot only some of the assumptions in some of the presentations but also our own.Several Private debt presentations made a compelling case from a return-seekingperspective but we wonder whether many of these shadow banking strategies havereally been stress-tested in adverse economic scenarios or even in ahypothetical sense (as actual banks must do for the regulators). In the US the Securitiesand Exchange Commission has just kicked off a series of initiatives looking atpretty much the same thing. Expect white papers on the subject of both issuesin the near future.
Ona slightly different tangent, one presentation suggested that an index approachto private equity could be a viable option, similar to what has beensuccessfully implemented in listed equities. This is a brave new world but, whoknows, maybe it could spark the same rationalisation of the industry that wehave seen in public equities. Key Insights from Thought-Provoking Sessions
Active Opportunities in listed equities
There were several there were presentationshighlighting the cyclical undervaluation of emerging markets and global smallcaps. The rotational nature of these markets during recessions was discussed,suggesting potential opportunities for investors although many portfolioconstruction professionals remained concerned that a recession scenario was notideal for these cyclical assets we continue to hope that enough people worryingabout that means it doesn’t happen and we get something more akin to thefollowing graph. Apologies for repeating ourselves with the following graph butwith all of this talk of recessions we are trying to maintain an optimistic andconstructive mindset! Who knows, stranger things have happened.
Still, forewarned is forearmed, and with Andrew Huntin town this week we hope to benefit from both attributes in equal measure.Next week we will report in more detail on his current thesis where inflationgives way to disinflation and potentially beyond into deflation.
