A lesson for all parents

I am listening to Dale Carneige's How to Win Friends & Influence People, a book I read about 15 years ago, and wish I had read 40 years ago. In it, he references this little poem, which I think all parents can benefit from. I wish I had heard it 40 years ago, too, as it may have influenced my parenting. Granted, this has NOTHING to do with investment performance, but performance as a parent has value, too, yes? (oh, and this appeared LONG before  Harry Chapin's Cat's in the Cradle, though the message is somewhat similar; this is by W. Livingston Larned).

Listen, son:

I am saying this as you lie asleep,
one little paw crumpled under your cheek and
the blond curls stickily wet on your damp forehead.
I have stolen into your room alone.
Just a few minutes ago,
as I sat reading my paper in the library,
a stifling wave of remorse swept over me.
Guiltily I came to your bedside.

There are the things I was thinking,

son: I had been cross to you.
I scolded you as you were dressing for school
because you gave your face merely a dab with a towel.
I took you to task for not cleaning your shoes.
I called out angrily
when you threw some of your things on the floor.

At breakfast I found fault, too.
You spilled things.
You gulped down your food.
You put your elbows on the table.
You spread butter too thick on your bread.
And as you started off to play
and I made for my train,
you turned and waved a hand
and called, ‘Goodbye, Daddy!’
and I frowned, and said in reply,
‘Hold your shoulders back!’

Then it began all over again in the late afternoon.
As I came up the road I spied you,
down on your knees, playing marbles.
There were holes in your stockings.
I humiliated you before your boyfriends
by marching you ahead of me to the house.
Stockings were expensive -
and if you had to buy them you would be more careful!
Imagine that, son, from a father!

Do you remember,
later, when I was reading in the library,
how you came in timidly,
with a sort of hurt look in your eyes?
When I glanced up over my paper,
impatient at the interruption,
you hesitated at the door.
‘What is it you want?’ I snapped.
You said nothing,
but ran across in one tempestuous plunge,
and threw your arms around my neck
and kissed me,
and your small arms tightened
with an affection that God had set blooming in your heart
and which even neglect could not wither.
And then you were gone,
pattering up the stairs.

Well, son,
it was shortly afterwards
that my paper slipped from my hands
and a terrible sickening fear came over me.
What has habit been doing to me?
The habit of finding fault, of reprimanding
- this was my reward to you for being a boy.
It was not that I did not love you;
it was that I expected too much of youth.
I was measuring you
by the yardstick of my own years.

And there was so much that was good and fine
and true in your character.
The little heart of you
was as big as the dawn itself
over the wide hills.
This was shown by your spontaneous impulse
to rush in and kiss me good night.
Nothing else matters tonight, son.
I have come to your bedside in the darkness,
and I have knelt there, ashamed!

It is a feeble atonement;
I know you would not understand these things
if I told them to you during your waking hours.
But tomorrow
I will be a real daddy!
I will chum with you,
and suffer when you suffer,
and laugh when you laugh.
I will bite my tongue
when impatient words come.
I will keep saying as if it were a ritual:
‘He is nothing but a boy – a little boy!’

I am afraid I have visualized you as a man.
Yet as I see you now, son,
crumpled and weary in your cot,
I see that you are still a baby.
Yesterday you were in your mother’s arms,
your head on her shoulder.
I have asked too much, too much.

The art of predicting

I purchased Nate Silver's The signal and the noise a few months ago, and it's been patiently waiting for me to crack its cover. Well, I finally did, and I am very much enjoying it, as I suspected I would (it was reviewed last year in the WSJ).

I will no doubt turn to this book at various times over the next few weeks, for input to blog posts. I'll share one excerpt now:

"In December 2007, economists in the Wall Street Journal forecasting panel predicted a 38 percent likelihood of a recession over the next year. This was remarkable because, the data would later reveal, the economy was already in a recession at the time. The economists in another panel, the Survey of Professional Forecasters, thought there was a 1 in 500 chance that the economy would crash as badly as it did." [emphasis in original]

Amazing, right? I especially love folks that would call themselves "professional forecasters."

Alas, even Mr. Silver misses the mark on predictions. He points out that "If you borrow $20 to wager on the Redskins to beat the Cowboys, that is a leveraged bet," and goes on to explain what the impact might be from leverage. He adds a footnote though to the bet itself: "And probably also a stupid bet if you've ever seen the Redskins play." The book was published in 2012. And, in 2012, the Redskins beat Dallas each time they played, 38-31 and 28-18. Oh, well...

Two ways to form a balanced portfolio

One of our verification clients has the following situation, which I think is interesting. They have a client who has their money invested in three classes: equities, bonds, and real estate. Because the firm wishes to utilize carve-outs, they've constructed three separate portfolios, by asset class, so that the cash is managed separately. And so, they have four composites:

• Total combined strategy (balanced) portfolio
• Equity portion (w/equity cash)
• Fixed income portion (w/fixed income cash)
• Real estate portion (w/real estate cash).

This raises a question: are they actually managing a "total portfolio," or are they managing three separate portfolios? This topic was raised, way back in 1992, with the AIMR-PPS(R) standards. In a Q&A booklet they published, they raised the point about "who controls the asset allocation." If the client does, then one could conclude that there is no "balanced portfolio," since inherent with a balanced portfolio are (a) the management of the asset class investments and (b) the allocation of cash across the asset classes. The reality is, most managers disregard this, and if they have a "balanced portfolio" that includes two or more asset classes, they will move it, en masse, into a "balanced composite."

Here we see the bringing together of three portfolios to form a larger one. And so, I reflected on this a bit.

We typically think of a balanced portfolio, being carved into separate asset-class portfolios, as shown here:

The pie as a single portfolio can be a real, single portfolio, or a virtual master portfolio, that consists of three subportfolios, which are kept separate to facilitate cash management (recall that under the new GIPS(R) (Global Investment Performance Standards) rules, we can no longer allocate cash, but must manage the cash separately). If the situation meets this form, then the three asset class composites would need to indicate the use of carve-outs.

Alternatively, we can view the balanced portfolio being constructed, as follows:

I've coined the term "carve-ins," because we're taking separate and distinct pieces (like a jigsaw puzzle) and bringing them together. An analogy might be those cheesecakes you may have seen, that are made up of slices of different types of cheesecake. The pie was not made this way; rather, slices from several different cheesecakes were brought together to form it.

And so, in this scenario, we took three different pieces, and brought them together to form a balanced portfolio.

IF these three pieces were not managed collectively, but instead individually, then this arguably constitutes a hypothetical portfolio. And the Standards, while allowing the use of hypotheticals, doesn't permit them as presentations that conform to the GIPS rules; they would have to be labeled as "supplemental." That is, there is no management of the collective, but rather only the individual parts.

Asset managers are sometimes asked (or choose) to bring together different portfolios to form a single one. Think about a manager that has a global mandate, as well as an emerging markets strategy. They may choose to combine them, to show how they would have done, had they offered such a strategy. BUT, they didn't offer it. This is hypothetical. Yes, they do, in fact, manage the parts individually, but there is no active management of the whole. And so, its combination is hypothetical.

Likewise, if our client didn't manage the collection of asset classes as a single portfolio, but rather was given three different and distinct mandates, combining them, to form a balanced portfolio, would arguably be hypothetical.

Let us know your thoughts, by commenting below.

A donation to ALSF

Last year, The Spaulding Group announced its intention to contribute a portion of the sale of (1) a book that was missing part of the reference section (Handbook of Investment Performance Measurement, 2nd edition), which we offer at a huge discount (turning lemons into lemonade), and (2) subscriptions to The Journal of Performance Measurement(R) to Alex's Lemonade Stand Foundation for Childhood Cancer.

Yesterday, Patrick Fowler (EVP/COO), Christopher Spaulding (EVP/Strategy & Business Development), and Douglas Spaulding (VP/Editor) visited ALSF headquarters and presented a check in the amount of $6,408.25 to Jay Scott, Co-Executive Director and Alex's father. We were pleased that we were able to contribute to such a worthy cause, and we thank those who renewed or began a new subscription to the journal, or purchased our book, as their investments in education made this gift possible.

We don't need to comply with GIPS to win institutional business!

We thought the industry pretty much agreed that compliance with the Global Investment Performance Standards (GIPS®) was a virtual requirement for asset managers targeting the institutional market, especially in the States, but we’ve recently encountered a couple firms who claim they meet with success in this market without complying.

 

While this may be true, we think they’re overlooking something.

 

What prospective clients are they not being considered for because they don’t comply?

 

No doubt there are investment consultants and plan sponsors who may favor compliance but don’t make it mandatory. But we believe many more strongly expect it or mandate compliance. Meaning, that a firm that is seeing some wins is not aware of the ones they’re not even being called for. I.e., how much money are they leaving on the table because of their non-compliance?

 

Many asset management firms identify their status vis-á-vis the Standards in online consultant databases. Many prospects check these sites to decide which firms to contact; and many note whether or not the firm claims compliance. Failing to comply means that you won’t hear from some of these firms.

 

To us, compliance is an investment; and we’ve heard from enough asset managers to know this is the case. And, verification is an investment, too, as prospects want some assurance that the firm truly is complying.

 

We also believe that the retail market’s interest in compliance is growing, as more managers see an advantage to comply and their prospects become more educated about the value of GIPS.

 

GIPS remains "best practice," when it comes to putting one’s performance track record together. Care to chime in? Please do!

Harvard students caught cheating

By now, you've probably heard about the group of Harvard University students who were caught cheating on a take-home exam. When you learn the details, I think you have to wonder about the supposed higher intelligence of Harvard students, but that's a different matter.

My reason for bringing it up: should we be surprised? Actually, should perhaps we be surprised that such cheating isn't more rampant?

What examples do our young people have, when it comes to integrity, honesty, hard work, playing by the rules, etc?

We've talked a lot about Bernie. And there are too many others in our industry who committed fraud. 

We've heard of the numerous teachers who either helped their students with their proficiency exams, or simply made changes, to boost scores.

In the world of sports, a source for many of our heroes, we have Lance Armstrong's "fessing up" (after denying drug use for more than ten years), new revelations about A-Rod, and many more, who used (use?) performance enhancing drugs. We also have allegations of coaches cheating (think N.E. Patriots) and "bounties" being offered to severely injure opposing players.

Politicians are legendary for their brand of dishonesty, but fields that one would have thought virtually immune to anything but the highest ideals are proving to have way too many bad apples.

Can a day go by without some new revelation of cheating, lying, etc.?

If there's a lesson, perhaps that in many (most, hopefully) cases, the bad guys get caught. Honesty (still) is the best policy.

"Be careful out there ..."

You may be old enough to recall the TV show, Hill Street Blues, where the sergeant would, at the start of each shift, tell the police officers to "be careful out there." Well, we need it said to us, too!

I got an email this week with the following:

I've annotated it a bit. On the surface, it looks quite legitimate; however, the email address looks suspicious. No, I did not click on the box to "get & print" my receipt.

Who can you trust? Sadly, it seems like the numbers are dwindling, though I remain a firm believer that most people are honest.

Must our rules be designed for the "lowest common denominator"? I don't think so. I think we should, in general, treat people with respect. That being said, we must still be cautious. Some of the most respected folks of our time (Lance, Bernie, and a host of televangelists) have let us down. Reagan's admonition to "trust, but verify" still has validity.

So, the firm claims GIPS(R) (Global Investment Performance Standards) compliance; great! Have they been verified? If yes, by whom? Are they credible?

If something looks too good to be true, it probably is.