The return of the sloth

January 15, 2013 Categories: Investment Strategy

Among the causes of wealth destruction during the 2008 Financial Crisis, it is quite easy to identify six of the seven deadly sins (greed, sloth, pride, lust, envy and gluttony). The only one visibly missing was anger; and arguably we have had plenty of that since!

Sloth is a particularly invidious wealth destructor characterized by the reliance on following the crowd or the reliance on generic reports from other parties such as rating agencies to impart wisdom. Slothful investing comes from being too lazy (or too cheap) to do and pay for the actual (hard) work and thinking that good quality investing requires, and in particular ensuring that your investments aren’t just herding with the crowd.

Unfortunately despite 2008, some new sloths seem to appearing under the institutional canopy and some old ones are creeping back in. Here are my Worst Five:

“Due to the low treasury rates investors need to “reach for yield”

  • I would disagree. Invest in higher yield if it offers good value. Investing because you think you have no choice rarely ends well.

Investing in a single global macro fund as “insurance”

  • Just because a particular global macro fund performed well in 2008 doesn’t make it an equity hedge. A single fund is not a robust insurance strategy. Are you investing in a broad enough group of macro funds and do you understand the scenarios where they will and won’t protect?

Tail risk strategies: sounds like a perfect investment?

  • So how many of these funds existed before 2000? Why so few? Why different this time?

A risk-free inflation protected premium for 15 years as “a liability surrogate”

  • This sounds ideal. But does anyone believe that none of these will end in tears. Do you know which?

Do we really need our own Operational Due Diligence (ODD) for “institutional” funds?

  • I’ve heard stories where consultants have recommended investing in single hedge Funds but without directive advice on operations. Post Madoff, this appears remarkable. ODD has a simple meaning – conduct robust Operational Due Diligence or wait for the Oh, Dear, Dear of avoidable errors.

There are many more examples that I see creeping in. But for 2013, please be aware of both the old and the new sloths; and be sure to do the work to keep them out of your investment portfolios.

Nick Spencer, Regional Alternative Consulting Director, EMEA

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