Muchas veces, los grandes
inversores, con grandes asesores, se meten en embrollos invirtiendo en
productos muy complejos, cuando lo simple es mucho mejor. Siempre la culpa es
de los asesores que se creen que tienen la obligación de conseguir un plus para
el cliente, y lo que hacen es volverle loco, o que pierda rendimiento…
Interesante entrevista sobre
por qué personas con alto patrimonio prefieren invertir (erróneamente) en
estructuras complejas (gestores activos, hegde funds, etc):
Surprised as I am at the relative lack of
evidence-based financial advice businesses around the world, the shortage of
evidence-based firms operating in the family office and institutional space is
even more pronounced.
A firm whose work we admire is Sparrows Capital, which began as a family
office in Jerusalem but has since moved to London, where it’s increasingly
working with pension funds and charities.
Sparrows is not against using hedge funds
or active management in principle, but it recommends that its clients use a
core of passively managed funds. Its board includes the distinguished
market historian Elroy Dimson.
I recently interviewed Sparrows Capital’s
founder YARIV HAIM and its Investment Manager MARK NORTHWAY.
Why, I asked them, do most wealthy
families and institutions still like to use complex strategies and expensive
hedge funds? What changes are they seeing in institutional investing? And what
changes do they expect to see in the years ahead?
Yariv and Mark, thank you for your time.
Yariv, please start by telling us about Sparrows Capital and where you see your
place in the market.
YH: It can probably be best described as a
single family office. We work mainly to preserve capital on behalf of a
Jerusalem-based family. Now, having had no experience in the financial world,
what the family asked me to do was essentially take a sabbatical and do proper
research to define what would be a sensible investment strategy going forward.
It is fair to say that our research
concluded that there is a kind of an informational gap in the financial industry.
On one hand, there are the managers and practitioners who argue that the best
strategy for an investor is to seek alpha and try to outperform. But the
academic research points quite conclusively in a very different direction. The
vast majority of actively-run strategies, when you take into account their
costs, tend to deliver results which are lacklustre compared to their
appropriate benchmark.
Interestingly enough, in the last year or
so, we have seen this inclination coming not only from the academic circle but
also from regulators. The FCA published a market survey in 2017, concluding
that, on average, most active funds tend to underperform their
benchmarks; and the European regulator ESMA published a report in January
echoing the FCA’s findings.
Mark, unlike Yariv, your background has been
in the financial industry. Tell us about the journey you’ve been on.
MN: I think the first important thing to
say is that we don’t take the approach that there’s no such thing as alpha. We
simply take the approach that alpha is extremely elusive and extremely
difficult to achieve consistently. I’ve seen a lot of strategies that have been
put together where, effectively, the primary purpose of those strategies is to
produce fees for the structurer rather than for the investor. So I approach
this with a fair degree of scepticism, and I think it is evident that the
application of skill to investing, although it is intuitively attractive, has
historically resulted in a negative return, relative to a pure beta approach.
What most investors should focus on is
achieving the returns that are available from the market, as simply as
possible, as efficiently as possible, and for as low a cost as possible.
Yariv, family offices traditionally rely
on costly and complex strategies. What reaction did you have from the family
you work with when you came back from your sabbatical and told them they should
primarily use low-cost index funds?
YH: Maybe surprisingly, they were not
shocked by these findings. They had tried to access the best managers for many
years before they asked me to try and assist. And while they had the experience
of working with some high-profile managers, they always sensed that, at the end
of the day, when you’re chasing the best performer of last year, you end up
disappointed with the actual performance of the following year.
So they always had that gut feeling that
this structure doesn’t really serve their interests as well as it might. My
research pretty much substantiated their gut feeling and, in a way, allowed
them to identify and crystallise a different investment approach.
I agree with your observation about
wealthy investors using complex strategies. High net-worth families and
institutional investors tend to be surrounded by more sophisticated advisers. These
may come in the form of consultants, IFAs, family offices, and such; and the
more sophistication you have around you, the more complex the decision-making
process is.
Mark do you have an opinion on why
extremely wealthy investors prefer complexity?
MN: I think it’s primarily behavioural.
We’re talking about people who have made tremendous wealth through the
application of skill and expertise; and it’s entirely unintuitive to someone of
that make-up that they should take that wealth and invest it in a way which
effectively decries the benefit of skill.
So, they are, in some cases, of the view
that they can find the manager who is going to produce added value for them;
and, in other cases, they are of the view (which is more dangerous, perhaps)
that they themselves or their own family office are capable of adding that
value. So their intuition leads them straight down a path towards active
management, in some cases with fairly disastrous consequences.
Interestingly, the one cohort which does
not behave like that is ex-fund managers and ex-owners of fund management
companies, particularly in the hedge fund arena. It is definitely the case that
hedge fund owners and hedge fund principals tend to invest in a way that is
very similar to the evidence-based approach that we advocate.
Why do you think that is? It seems rather
cynical to earn a living speculating with other people’s money and not be
prepared to do it with your own.
MN: They would take a different line. They
would say their entire business and livelihood is dependent on alpha and
leverage; and, when it comes to banking the wealth they take from that, it’s
time to take a different approach. But yes, I think, in some cases, one can see
a degree of cynical behaviour.
As well as high-net-worth individuals, you
also work with institutional investors — trusts, endowments,
charities and so on. What response do you generally have from trustees when you
talk about EBI?
MN: We get a variety of responses from
trustees. You have to be aware that the investment consultant’s business model
is typically heavily dependent on locating outperforming managers. Therefore,
we represent some degree of threat to that process.
Again, it comes down to human behaviour.
If you show a trustee that he or she has underperformed over time through
manager selection, they are very loathe to do anything about until such a time
as the situation changes, which effectively condemns them to carry on in the
same manner ad infinitum.
People don’t like to admit that they’ve
made a mistake, put the white flag up, and change their approach and bank the
loss. All it does is it stimulates, in many cases, an increased desire to
outperform. So there is a strange psychological reaction to that information.
As a firm, you’ve produced several case
studies demonstrating that families or big institutions would have been far
better off if they had embraced an evidence-based approach years ago. Tell us
about those.
MN: What I think is clear, in all of the
case studies that we have done, is that when one looks at the collective costs
involved, the performance of active managers is generally significantly short
of benchmark. There are two reasons for the shortfall, really. In some cases,
it comes down to stock selection by the managers or by the fund itself, and in
other cases, it comes down to timing. And those timing decisions have been made
by the trust or by the manager or the consultant for positive reasons, for reasons
of protecting the wealth which is entrusted to them. But the net result is
almost always that they will take the money off the table at the first sign of
volatility, then put it back, and not re-risk the portfolio until it’s too
late. The effect is that they underperform what would have been the case had
they done nothing.
Yariv, would you agree with Mark that this
primarily a behavioural issue?
YH: Definitely, and it’s not just one bias
where, if we overcome that one single factor, we can overcome all our
psychological biases. Kahneman and Tversky showed that our loss aversion, how
much we dislike losses, is not symmetric to how much we enjoy gains. So, that
is quite an interesting theory and observation. It means that we prefer to
potentially give up on certain potential gains, just for the sake of avoiding
really relatively modest losses, even if they are just for the short-term.
Yes, we tend to be loss averse on the one
hand, and yet overconfident on the other. It’s a dangerous combination, isn’t
it?
YH: Absolutely. I think it has already
been observed that what we do is, we tend to appreciate the good things that
happen and ascribe them to ourselves. When we experience negative outcomes, we
tend to blame other people or events that nobody could have foreseen.
Therefore, that allows us to try and keep doing what we are doing and expect
different results.
Unfortunately, in the world of
investments, for long-term investors, it is unlikely that the traditional
approach of trying to find alpha and outsmart everybody else will generate the
desired outcome.
Having said that, you don’t exclusively
recommend traditional indexing, do you?
MN: That’s right. We have what we term a
barbell strategy. Our view is that investors need to have some hope that they
will outperform — it’s something that we need to accept is there — but that if
we simply invest everything they have for alpha, they will end up paying a
large amount of fees for what is effectively underperformance.
So our view, and this is very much
supported by the FCA and the findings of its asset management study, is that
the majority of somebody’s portfolio is beta — it’s market exposure, it’s not
skill. Across that beta, you shouldn’t be paying for skill. You should be
accessing market exposure through highly efficient instruments like
exchange-traded funds or index funds.
At the margins of that, by all means, go
for alpha plays through selected managers and funds. But make sure you don’t
miss out on the market returns across the bulk of your portfolio while you’re
doing so. And use the efficient core invested in ETFs as a benchmark for how
your alpha strategies are doing around the outside.
So, if you want private equity, if you
want infrastructure, if you want mortgage-backed securities, by all means, use
them as satellites around the core. But your core should be managed for high
efficiency. And that is an interesting play because it doesn’t appeal
psychologically to most people.
What about hedge funds? Historically
they’ve almost been the investment vehicle of choice for family offices and
institutions, but their net performance in recent years has been very poor.
MN: It is certainly the case that
alternatives, and hedge funds in particular, have underperformed market
exposures across the cycle, even taking into account the global financial
crisis.
I think most institutional investors,
where they are using alternatives, are tending to use them in addition to
outright market exposure. They tend to view hedge funds as a way of distilling
skill and distilling alpha, so you can make your portfolio construction
decisions separately from trying to identify skill or inefficiencies that you
can take advantage of.
So I think, in the case of the
sophisticated institutional portfolio, there is an argument for an allocation
to alternatives, primarily as a diversifier. Where people come unstuck is
believing that hedge funds are a sensible way to construct an entire portfolio.
You mentioned private equity earlier.
What’s your view on that?
YH: I think private equity essentially
provides further diversification to a portfolio. It provides access to areas of
the investable universe that are otherwise inaccessible. So there’s definitely
a place for private equity in a broad portfolio. The question is, how big an
exposure should you allocate? And you need to bear in mind the risks that are
inherent in private equity investment. The other question, obviously, regards
fees. I think the cost of private equity investment instruments today is still
relatively high and we are living in in an era where investors are becoming
more and more nervous about paying substantial fees to investment managers
wherever they may invest.
MN: Another attraction of private equity
as an asset class is that, theoretically at least, it provides access to a
liquidity premium. A very large number of companies are unlisted, so if you can
gain exposure to those companies and be paid a liquidity premium for doing so,
then it’s logical to do it.
The other issue of it is the feedback
loop. The time it takes to assess whether or not a private equity portfolio is
performing well or performing badly is immensely long. Realistically, in some
cases, it can be 20 to 25 years down the road, before you are able to say
whether it did well or not.
Private equity also has issues around
transparency, doesn’t it, in relation to both cost and performance?
YH: Yes, and that’s a concern because, if
you want to adopt an evidence-based approach, you need to build it on the
evidence you have in front of you. And it’s not surprising that people from the
academic world are asking private equity firms and investment houses to publish
their figures in a more transparent fashion, so they can scrutinise performance
properly.
You’re very fortunate to have Elroy Dimson
on your board. How important is that?
MN: Elroy is effectively the Eugene Fama
on this side of the Atlantic. There hasn’t been the appreciation in the
European investing industry — with the possible exception of countries like
Germany — of the value of academics or of academic research. We still tend to
have a more subjective, intuitive-based investment environment.
But I think that is changing. People are
beginning to recognise that there is enough history to come to some serious
conclusions. There are some lessons you can’t avoid — primarily the
difficulty of identifying alpha, the importance of the strategic asset
allocation for any investor, the importance of managing costs, and of
diversification.
I think there is a movement. We’re now
seeing a lot of the investment houses who historically regarded passive
investing as simply a nuisance starting to produce their own offerings. They’re
not necessarily leading with those offerings, but where a client asks for them,
they’ll certainly have them available.
The other important thing about Elroy is
that he chaired the Strategic Investment Council of the Norwegian Sovereign
Wealth Fund for many years. There’s a real similarity between that fund and our
own evidence-based investment philosophy. We have essentially followed the same
learning pattern, reached the same conclusions, and we invest in a very similar
manner. We expose our portfolio to the global investable market in a rule-based
manner and simply rebalance back to the strategic asset allocation over time.
We think the performance of the Norwegian
Sovereign Wealth Fund speaks for itself and we’re pleased to have Elroy on
board as an adviser.
Finally, how do you see the industry
changing over the next ten years or so?
I think the conversation is changing from
active versus passive to what the role of alpha and beta in your portfolio
should be. Those discussions were, initially, at an institutional level, but
now they’re getting down to personal portfolios, and that process is helped by
the arrival of robo-advisers, which tend to use fairly beta-heavy portfolios. I
think that is a useful development.
We are going to see a continuation of the
race to zero in terms of fees. Already, in the US, we’re seeing ETFs with zero
fees. Europe hasn’t got their yet, but it’s heading in that direction. That in
turn is driving down fees that active managers charge, and that is likely to
result in some degree of consolidation in the active fund industry, which is
probably overdue.
The other influence that we are expecting
to see is that of machine learning. It’s very difficult to identify what
machine learning will do to the industry. Arguably, it will increase the
ability of the market-making community to take inefficiencies out of the market
and therefore make markets more efficient and make production of alpha even
more difficult. So, potentially, it increases the relevance of beta and
beta-style investing.
There will undoubtedly be a series of
hedge fund managers with machine learning capability who hold themselves up as
being able to deliver that capability to the individual investor.We’ll have to
see how that works.
Abrazos,
PD1: De Cara a Cara: Rezar es
abrazar
