Soft landing in sight? ??

Well hello, and a Happy New Year to you all! Especially all my fellow Paw Patrol fans out there. Great to see you back here again. Is that a soft landing I can see?

I’ve got an interesting idea for you all to start the year - how about thinking deeper about ... quitting? Yeah. In investing and in life the power to change course and re-allocate resources gives us the ability to take decisions quicker and with less information (which is good), but we don’t usually exercise that option as often as we should for a whole load of complex psychological reasons. Annie Duke explains all this and how we can set ourselves up to make better “quit” decisions in our latest podcast (web | apple). Anyone who has wrestled with decisions over an underperforming manager or strategy will get something out of this I think!

I’ve been enjoying a couple weeks of extended paternity leave - really grateful to LCP for offering that opportunity. So, I’m going to go ahead and add to my list of skills on Linkedin “deploying a double Bugaboo from the boot of a car in under 30 seconds”. If you know you know, amIright?

Markets have started the year by going up with emerging markets leading the way. Some data out of the US on employment suggested this elusive “soft landing” (wherein inflation falls without causing a major recession) may be possible. I feel like this question is very much defining “the vibe” of the year, expect it to be revisited many times on both sides.

Today’s CPI data in the US will be closely watched, the expectation is for a fall in the headline inflation number. For now this continues to be **the** data to watch, and I think we should expect surprises in BOTH directions on this during the year. Bonds are up and 10-year interest rates are down (by 0.3-0.4%).

Chart of the week - it’s the end of an era, gosh that was a wild time, wasn’t it?

Three things I’m reading

1. An Open Letter to Investment Consultants - Richard Ennis (link)

The big picture: Co-founder of consultancy EnnisKnupp has some challenging asks of fellow investment consultants, and I’m here for it. The 11 suggestions (some uncontroversial, some more so, depending your viewpoint) represent a decent manifesto for improving the impact our profession can have, imo.

The bottom line: I feel like the investment consulting profession in the UK particularly is under the spotlight - some might say under pressure - moreso than it has been for most of the last 20 years of my career. My view: I think we’re grown up enough to take on a little criticism, face into it and respond in a sensible way. Personally I do believe quite strongly we do important work, but no-one is immune from taking a little flack once in a while and we can all improve.

What to know: There’s a lot in here but it’s a quick read (do have a look yourself) and a whole day could be spent discussing a debating the suggestions - I’m up for that if you are!

Here are my thoughts on three of the 11 asks:

Talk in plain English. (#4) Won’t be a surprise to anyone that I’m here for this. Jargon and empty language are endemic. And to be honest I think this is one of those things that everyone like, agrees on, but we still find ways to not actually do it. Honestly, I think that’s partly because for folks early on in their careers, jargon sounds like knowledge (be honest, we’ve all been there) and those folks often create first drafts of papers, containing jargon and empty language, that doesn’t get picked up on as often as it should. Think we could all do better here.

My two pet peeves here are the empty expressions “somewhat muted” and “robust risk adjusted returns”, but there are loads of others I see all the time.

Have a passive benchmark. (#8) Some might find this a little more controversial, others probably think they already do this, but don’t really. A lot of our monitoring (for DB pensions) clients has focused on liability-relative measures, which are important, but I think a simple-as-possible, passive approach to deploying the chosen risk level is a really elegant and important benchmark for all investors to be aware of and isn’t done often enough. A lot of time and effort can get spent wriggling out of such comparisons.

Get off the fence once in a while, have views. (#3) Richard nails it when he says that consultants often “dance” when asked views. Yes, markets are hard to predict and of course the job isn’t to go around calling stocks this month, I think everyone gets that. But that mindset can easily slip into a shrugging know-nothing “if I knew that I’d be on a private island bahaha” sort of mentality, and we can do better than that.

Have common fundamentals that drive your investment posture (#5) (and talk about them). The biggest cliche in consulting has to be “it all depends … on the objectives and the constraints of the client”. This is designed to sound smart and make clients feel special, but can’t possibly be totally true 100% of the time, or shouldn’t be. I think clients do want to hear a little about what you stand for, what’s your thinking on key issues and what’s shaped that thinking. Many firms have spent the last 20 years getting succcesful by being studiously uncontroversial and aiming to appeal to everyone. I think that era is over.

So much more to say on this - let me know what you think, which of the 11 asks are most controversial?

2. 7 Decision errors in investment management (link) by Joachim Klement

Errors of ommision, commission, seeing causality where there is none and cascading unforseen consequences. An important tour of the sources of decision error. We surely all recognise some of these! Unfortunately avoiding them is harder than identifying them.

3. AQR - the bubble has not popped (link)

After a good year for value investing, AQR find its “cheapness” has hardly fallen much from the extreme levels it reached in late 2021.

4. JP Morgan Guide to the Markets 2022 (link) . Of course JPM are out quicktime with their indispensible yearend chartpack to help recap a historic year in markets. Well worth taking some time to pick over. A couple charts I thought were interesting -

Where 2022 leaves us in the current rate rising cycle **subject to errm, change**

Earnings estimates - no recession there (yet)

Here’s the comparison with the same earnings chart from their October pack:

Two things I’m listening to

1. Michael Mauboussin Invest Like the Best with Patrick O'Shaughnessy (web | apple)

You must know by now that I consider a lot of Michael’s work essential reading for anyone involved in investing. Here he discusses a couple pieces of recent research including new work on (corporate) capital allocation (link) as well as recapping ideas on intangibles and return on capital. Packed with ideas.

1. Oddlots AMA (Ask-Me-Anything) episode (web | apple)

Rare opp to hear Joe and Tracy answer questions and talk about their views, podcasting, work, life and more. They’ve become two of the biggest finance/investing podcasters in the world and I do like it when podcast hosts flip the script, think this works and is worth a listen - and if you aren’t already a regular listener to the show (what, have you been on Mars or something?) then get this on your playlist for 2023.

Grab bag

LCP colleague Stuart McDonald MBE has been getting a tonne of airtime recently (Sky news article), although unfortunately that’s due to really quite bad news on excess death rates in the UK during 2022 and the dire state of the NHS. Looking forward to getting Stuart on the podcast to get into this more, but this is worth a (sobering) read on what looks like one of the big ongoing stories of 2023. Article with more details here, bottom line is that ~400 additional deaths are happening per week due to longer wait times in A&E. FT columniust John Burn-Murdoch is also important (but difficult) reading on unpacking causes in a data-driven way (twitter thread here)

Nearly finished the Wirecard book (“Money Men” by Dan Mccrum) - v good read, equally amazed/shocked both by the Byzantine world of online payments (honestly, why?), and the sheer difficulty of actually exposing outright fraud when it does happen.

That’s it - see you in a couple weeks (and hopefully maybe have some more lighthearted stuff then too)

Thanks for reading Your Thursday Investment Fix