The Ghosts of Commentary Future
November 30, 2020·3 comments·In Brief
The financial industry produces thousands of end-of-year outlooks and predictions that nobody actually uses for decision-making, yet everyone demands them anyway. These pieces aren't designed to inform strategy or change minds. They're acknowledged by everyone involved as hollow ritual. What persists when everyone agrees something has no value?
• Active management letters arrive each November claiming renewed opportunity in volatile markets. Fund managers point to recent outperformance and dispersed returns as proof their stock-picking works again. But the mechanism they describe applies equally to all active managers, which means nothing about the structure of the market itself has changed to favor some over others.
• Economic predictions and year-end price targets flood inboxes from sell-side strategists and research houses.These forecasts function as sales tools, not decision inputs. Financial advisers rarely integrate them into actual asset allocation models or client recommendations, despite the effort required to produce them.
• The industry solves the appearance problem instead of the real one. When clients ask why they pay for active management or advice, the answer comes in the form of compensation structures that look like alignment without delivering it. Agents selling these structures benefit from the appearance of shared interest more than actual shared outcomes.
• Everyone involved knows these pieces contain no informational content. The author, the publisher, the readers, the fund manager writing the letter all understand these aren't designed to change anyone's mind or guide actual decisions. Yet the cycle repeats annually without question.
• The persistence of meaningless ritual reveals something deeper about how the industry operates. If commentary this hollow survives because it's expected rather than useful, what else in finance persists for reasons that have nothing to do with helping clients or functioning markets?
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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Comments
Hey Rusty…I’ve been looking forward to Epsilon Theory’s top ten predictions for 2021. when do y’all think you will have that ready?
It’s going to be a great year for Top Ten predictions!
Fun story that I hope you’ll enjoy.
My firm has an internal SMA, access to about a million external ones, and one that’s kind of a weird hybrid. They aren’t a wholly owned subsidiary, but 95% of their AUM comes from our firm and they don’t accept any outside money. They run the shop as they please–and they’re pretty good as far as that goes–and they are quite accessible to us lowly FAs. They have a fund that is based entirely on our company’s research. If we don’t cover it then it’s not in the fund. The MD told us at a meeting that not one single dollar from anyone within his group of employees or PMs is in said fund. He was explicitly telling us to not buy this dog for our clients. See, he answers to all the FAs, and when we have a client get burned by a bad fund we pull everything and go elsewhere. All his other funds perform well, or at least they don’t embarrass him. But this one fund, the research fund, is an embarrassment. Our company puts out research that very few read, even fewer take seriously, and that is utterly ignored–accept for a contractual obligation–by PMs. That should tell you all you need to know about this particular corner of the financial services world.
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