May 17, 2019
What We’re Reading This Week
I am always interested to see articles discussing active vs. passive investment management, especially lately, when so much of that discussion is focused on “smart beta” or factor-based investing. Most recently, I came across an article about Invesco’s review of bond funds and what results in outperformance in a market. While exploring actively managed fund returns Invesco found that:
“Managers provided high returns in part by investing in securities that were cheap relative to their sector and ratings peers.”
Or put differently,
“These managers haven’t beaten their benchmarks by acting on unique investment insights. The alpha stems from their funds’ exposure to the value, carry, liquidity and quality factors, explained Raol.”
Invesco seems to be thrilled because they feel like they can now just program a computer to look for the same thing. Which, is news, I guess.
This is sort of trading on a weird perception that computers sift through an amazing amount of data to make investment decisions, while expert traders just sort of sift through tea leaves to make decisions. Expert bond traders and even equities traders are making decisions based on data, the same data that computers have access to. The idea that a computer can make the same decisions based on the available data sort of seems obvious to me.
From Invesco’s perspective I suppose there is some advantage in that one: computer-based funds seem to be popular right now and two: it’s probably cheaper to pay someone to program the computer once rather than pay a fund manager every year.
To me, it’s not a question of whether a computer can follow the rules, but rather knowing when it shouldn’t follow the rules. Human intervention is not needed to follow an explicit buy/sell strategy, but what about exceptions to the strategy? There is undoubtedly some amount of market data that can’t be reduced to a simple math equation (or even a complex one), but probably…most of it can be? Which is undoubtedly a bummer for active traders.
Of course, I’m referring to Uber – the king of the unicorns. The extreme valuations in the tech community are troubling for a number of reasons and Uber, maybe better than anyone else, is a poster child/cautionary tale. Certainly, the tale is not over, and Uber will probably do more things, but there is a lot to look at here.
The New York Times published a nice piece detailing Uber’s journey from $120 million valuation to $60 million (at its low this week).
Uber likes to compare themselves to Amazon and to be fair, when Amazon debuted the market was divided. Many Wall Streeters expected the company to go out of business. However, Amazon had only spent $1.1 billion before they were able to turn cash flow positive. Uber has already spent ten times that amount without an end in sight. If anything, Uber will face more obstacles in the market as competition grows.
That competition comes from taxi companies, Lyft, and China’s ride-sharing company Didi. That last one is sort of a big problem. Softbank, a Japanese investment company, is Uber’s largest investor. Last year, Didi also acquired 99, Latin America’s transportation start-up:
“In January 2018, Didi agreed to acquire 99. Both SoftBank and Didi also started directing funds toward pushing deeper into Latin America; SoftBank eventually created a $5 billion fund earmarked specifically for investing in Latin American companies.
For Uber, the timing was terrible. The region was one of its most promising growth areas, and its competition had ramped up. By this February, the damage in Latin America had begun showing up in Uber’s results in the form of slowing growth.”
That’s not great.
The Times also makes a great point, that many people who would traditionally participate in the IPO already owned Uber – they purchased shares at lower prices. In the current market, tech companies have been incentivized to remain private and eschew a public offering, at least for a while. The unintended consequence of this is that large funds and institutions lack a real incentive to participate in the IPO, which traditionally relies heavily on institutional investors.
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