We watch investment management industry trends to understand what others are doing and, hopefully, validate our approach. Also, we look for those with similar approaches to ours— hopefully, successful. And we look for innovative approaches to complex investing subjects. We have all three this quarter.
What’s the latest trend for wealth managers and asset managers? Cooperation. “Wealth and asset managers will focus on renewed growth triggered by strategic partnerships and M&A” (mergers and acquisitions).[1] The article discusses this trend against a backdrop of previous trends: ESG investing, private equity investing and AI investing, each losing steam for reasons of “wokeness,” illiquidity, and too early to tell, respectively. The tying together of backroom operations of wealth and asset managers will aid in “capturing investors’ wallet share.” For simplicity, we’ll call wealth managers client-facing and asset managers product producers. “This transformation can involve a delicate balance. Tech-led mass market production (asset management) must be industrialized while trust-related private banking (wealth management) specialties must be preserved.”[2]
While some of the wording may be new, the trend toward consolidation in the industry and homogenization of investment products has been going on for over thirty years. We’re not sure whether that has been for the benefit of investors or merely for investment companies. Almost all the new products to be introduced are pooled investment vehicles. We believe that the benefits of staying minimally invested in pooled investment products make it a valuable choice.
Focus on High Quality
In GMO LLC’s Quarterly Letter for 4Q 2023, they remind investors that “if you were going to have one permanent bias in your equity and high yield bond portfolios it should be in favor of high quality.”[3] We appreciate the sentiment and have been following that logic for some time. In the article, the author defines high quality as those companies “with high profitability, low profit volatility and minimal use of leverage.” We agree with two of these but have some doubts about measures of volatility that purport to equate with risk. In general, volatility may be more closely related to investor behavior than to the riskiness of a particular company.
In discussing recent market highs combined with relatively low volatility, a Wall Street Journal article describes the markets as being “driven much more by greed recently than by fear. The problem is that the longer that goes on, the more fragile it becomes.”[4] We add two additional measures of our own to what describes high quality: strong balance sheets, which expands beyond the measurement of indebtedness, and strong managements, which is harder to quantify for computer model analysis. At Woodstock, our portfolio managers follow the quarterly reporting of the companies on our Monitor List, the companies that go into client portfolios. Over time, they develop a feel for managements’ approach to adversity and to accurately describing their companies’ strengths and weaknesses. This is an important component in determining whether a company with a depressed market price is worth investing in for its upside potential or is headed down for good reason.
Tech Lessons Learned
As tech investing is a key part of the investing world, an article describing mistakes made caught our eye.[5] All five lessons the author points to are good ones to keep in mind for investors in tech companies and ideas. His first comment is that “disruption is overrated.” He adds, “The notion that any sufficiently nimble upstart can defeat bigger, slower, sclerotic competitors” ignores the current world “where incumbents have an ability to reinvent themselves at a pace that simply wasn’t possible in the past.” Further, modern incumbents tend to be aggressive. Another of his points is that instead of worrying about how a tech executive may be lying to the public about how transformative their new product or service may be, instead ask, “How are they lying to themselves?” This isn’t really a swindle if things go wrong. It transforms the lesson into “let the buyer beware.”
We know that you are the most valuable business development tool that we have. Your referral of a friend, colleague or family member to us is the most important way that we grow. We thank you for your support and want you to know that we are dedicated to serving your best interest.
William H. Darling, Chairman & CEO
Adrian G. Davies, CFA — President
[1] Yuri Bender, “Wealth and Asset Managers Stronger If They Pull Together,” PWMNET.com. May/June 2024, p. 4
[2] Yuri Bender, “Wealth and Asset Managers Stronger If They Pull Together,” PWMNET.com. May/June 2024, p. 4
[3] Ben Inker, “The Quality Anomaly; The Weirdest Market Inefficiency in the World.” GMO, LLC, Q4 2023
[4] Jack Pitcher, “Investors Fear Calm In Market Can’t Last,” WSJ, 6/17/24, p. B1
[5] Christopher Mims, “5 Lessons from a Decade of Being Wrong about Tech,” WSJ, May 18-19. 2024, p. B5