Dissection of an Investment Presentation (Part 1)

Investment presentations often sound quite tantalizing. Critical thinking must be applied in order to assess what meat (if any) is actually there. The video referenced here is accessible over the internet. Today I will begin to discuss my thoughts as an exemplar of what to look for in such a presentation.

Here are a few general recommendations to keep in mind. First, do not be blinded by the light: their job is to make things look good. Second, accept no comparison without assessing the comparator. Finally, challenge everything. Anything that can withstand such scrutiny and still come out looking impressive is probably deserving of closer attention.

     > Quantitative Portfolios combine the benefits of passive
     > investing with the portfolio customization of managed

“Quantitative Portfolios” is a complex-sounding eight-syllable phrase. Capitalizing “portfolios” makes it seem like an advanced product. Quantitative just refers to numerical measurement rather than semantic description. Most portfolios are quantitative because some number is calculated somewhere. “Quantitative Portfolios” could therefore be much ado about nothing.

Passive investing usually misses the benchmark due to tracking error and expense fees. This falls under my category of subpar returns and right off the bat, I suspect this might be a garden-variety offering.*

     > accounts… low cost access… with opportunities for

“Low cost” is also suggestive of a garden-variety offering because I don’t believe the intellectual capital (including dedicated quantitative analysts) needed to boost a garden-variety strategy to something more optimal comes cheap.

     > personalization and tax management.

I think [portfolio] “customization” and “personalization” are best used as marketing buzzwords.*

Tax management can be useful but hard to measure.*

     > Factors are the basic building blocks determining an asset’s
     > risk and return… since [1990s], hundreds of… factors have
     > been researched.

Researched by whom and to what extent? Some sort of reference would be useful.

The seeds for data-mining bias are planted here. By chance alone, an exhaustive (i.e. “hundreds”) study of historical data will usually turn up at least a couple highly-correlated relationships. Correlation does not imply causation, however. This is not the best way to identify relationships likely to be predictive of the future.

     > Both the momentum and value factors have been heavily
     > researched for at least 20 years by leading academics and
     > industry practitioners and used extensively in practice by
     > well-known quantitative investment managers.

I have read about the advantages of focusing on momentum and value over the years. Familiarity breeds credibility. This is important to recognize for the sake of objectivity.

The sentence sounds matter-of-fact and official, which can be very persuasive. Dig a bit deeper, though, and we can see that critical information is omitted:

• Who are these “leading academics?”
• Are they skilled investors (i.e. is there reason to think this might be actionable)?
• To assess quality of the research, what are meant by “extensively” and “well-known?”
• Have the investment strategies outperformed benchmarks and increased AUM for the firms involved?
• What do the drawdown distributions look like?

These unanswered questions can raise doubt about validity.

Finally, most investment categories (e.g. active, passive, hedge funds) represent significant improvement. I [optimistically] assume that at some level, all approaches are managed/developed with “heavily researched” factors and “leading academics” doing the work. This limits the positive impact of the whole statement to something less than optimal.*

I will continue next time.

* These are good topics for future blog posts.