“In order for an economic forecast to be relevant, it must be combined with a market call.” – David Rosenberg
Really nice post here by Josh Brown on some of the messed up nonsense that flies as viable investment advice in this business and how it can be sold deceptively depending on who does the selling. Josh goes into some detail on a product sold by Natixis using a strategy devised by genius economist Andrew Lo. Lo is a famous behavioral economist and the founder of the Adaptive Market Hypothesis, a twist on the Efficient Market Hypothesis. The problem is, while Lo is a great economist, he doesn’t seem to be much of an asset manager. In fact, Lo’s fund has been a miserable performer as Josh explains:
“Since its inception in August of 2009 – weeks after the generational bottom – the ASG Div Strat Fund lost money during almost every quarter. It’s compounding at something like negative 7% a year since 2010. It managed to lose money in a bad market (2011, negative 2.75%), a good market (2012, return was negative 7.69%) and a raging bull market (2013, in which it lost another 8%, inexplicably). It’s hard to say that it’s meant as a bear market vehicle or a short fund, because it actually earned 8% in 2010 with the S&P up 15. So if you ask “What is the ideal environment for this strategy?” the answer is that there isn’t one.”
With the exception of the nearly criminal futures ETFs with the inherent negative roll (practically guaranteeing you will lose money thanks to chronic contango) it’s hard to find an investment product that has so consistently lost money since 2009. But this has less to do with bad fund design and more to do with bad management. And that gets to the heart of the issue here – economists usually aren’t good asset managers. We’ve seen this with LTCM, in almost every Wall Street firm and in countless other examples. And the reason for this is simple – their actual experiences are entirely different.
Economists tend to have a totally different mindset than asset managers. Economists tend to have a rigid approach to the world. They adhere to a certain doctrine (usually highly influenced by their personal politics or the “school” where they were taught economics) and are notorious for confirmation bias in their data. Professional money managers, on the other hand, learn quickly that confirmation bias and inflexibility are the ideal ways to get fired. This isn’t always the most beneficial approach for their clients, but it sure beats the heck out of adhering to the same deficient and biased strategy for all of eternity.
And this a big problem for those of us picking asset managers. We often assume that bigger brains will necessarily lead to better returns. But that’s not always the case. And in fact, the wrong temperament or the wrong process is all that’s needed to guarantee failure. This doesn’t mean all economists are necessarily bad asset managers, but it’s very unusual to come across the person who can traverse both fields successfully because they both require different and diverse skill sets.
The bottom line: when picking an asset manager be careful assuming that really smart people will make better money managers.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.