The generalists are mostly gone from our profession and the professionals are now specialists.  Technology will continue to bring cheaper, better products to the consumer.  ETP are one example of technology driving cost down and eliminating the many middlemen.

Due diligence today has not changed much from 30+ years ago.  The people, process, and other P’s remain core to the process.  The industry taught asset allocation as the most important decision investors could make.  This is still true.  If you allocate 100% to stocks and stocks do well, you will too.  However since no one is/was consistently good at market timing, asset allocation became defined as strategic, boring, and something to beat to make a fee.

What we then created is an industry specializing in parts, to add, to beat the strategic asset allocation of 60/40 or 70/30.  An index or benchmark was the starting point of understanding of how portfolios are different and therefore, the potential results.  Investors could then truly understand the risk of each manager or portfolio versus an index. That goal has past; we failed to properly educate thus creating a “Beat the Benchmark” environment.

The easiest way to beat the benchmark is to change it because you cannot change your results.  Many have.  Ultimately, there are only two types of investments (stocks and bonds) because you can only be an owner or a lender.  Everything else that does not have cash flow or earnings is a derivative or people hoping for a higher price (i.e. beanie babies, bitcoin, art, wine, etc.); this is true speculation using fancy math to prove differently has not worked, unless you changed the benchmark.

Is allocating assets from growth to value market timing?  During the year of the tech bubble bust, growth declined 22% and value increased 7%.  A 29% difference.  If this is market timing, then security selection based on any factor is also market timing.  At some point in the future, as we go through the factor phase, we will have to deliver to the end customer what they want – a whole portfolio to do well against 60/40 or 70/30.  At some point, asset allocation (Balanced Managers) will be back in favor because the consumer wants a whole portfolio that does well, is simple to understand, and does not have to listen to fancy math that they don’t care about.

Unfortunately, if we spend more time on the whole, many people who work on parts will not have a job in our industry.  This is the cycle of every industry.  Build it, break it apart, and put it back together again, differently. I believed it was Roger Ibbotson that said to, “Enjoy the Ride,” when talking about data and how we in our industry define and use the past to determine the future.

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