Introduction

In a recent reading of Validea’s Guru Investor Blog, a quote from Georgetown University finance professor James Angel struck home to me: “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.” In order to see why the analogy fits, it is worth looking at the structure of the financial services industry. In the following, we look at the managers, their clients, and the mangers’ marketing approaches.

The Managers

Pensions and Investments (P&I) surveyed 565 financial managers. They found they are managing just under $68 trillion. And as Table 1 indicates, each of the top ten is managing at least $1 trillion.

Table 1. – The Largest Global Money Managers

Source: Pensions and Investments

The Target Markets

A good portion of these funds are being managed, directly or indirectly on behalf of individuals. Table 2 presents data on the assets and liabilities of US households. Households own directly almost $18 trillion. They decide how to invest these funds. They might have advisors, pick stocks individually or buy mutual funds or exchange-traded funds. In the case of their pensions, mutual funds and insurance, they defer to others to make specific investment decisions for them.

Table 2. US Households Assets and Liabilities, 2018 (bil. US$)

Source: Federal Reserve Flow of Funds Data

Individuals have $23 trillion in pension claims but Table 2 indicates they only have $19 trillion in “funded pension assets.” So how do pensions invest their monies? Most pension funds take steps to avoid direct liability, so they create investment committees. These committees also want to deflect direct responsibility, so they hire recognized advisors. These advisors do not decide how to invest their monies. Instead, they again deflect responsibility by recommending managers and the sorts of investments the managers should make.

Promotions

Like other industries, these managers have to promote themselves to get clients. And certainly, they try to do this in an entertaining way. And like gaming firms, they are in the risk-taking business. I recently did a piece comparing money managers’ marketing promos for wine. Table 3 lists terms used to market securities. The columns include sector descriptors and marketing terms. Note that however invested/promoted, the assets of all money managers plummeted in the 2008-09 selloff.

Table 3. – Asset Class/Sector Descriptors and Marketing Terms

Source: Mostly Pensions and Investments

 What Are the Consultants Convincing the Pension Funds To Do?

 Pensions & Investments provides details on the moves of pension funds. Here is a sample:

•  The Bethlehem PA Aggregated Pension Plan is searching for a manager to run $5 – $10 million private state government–leased real estate strategy.
• The Chattanooga TN Fire and Police Fund is looking for a US Small-Cap Equity manager. The manager is expected to balance out the value bias in the plan’s small-cap bucket.
• The $359.3 billion California Public Employees’ Retirement System sold one of its main forestland portfolios valued at $2 billion. The Forestland Portfolio underperformed, earning only 1.9% in the last year (versus 15% for the S&P 500).
• The Texas County & District Retirement System invested $$97 million for real estate investments in Western Europe and $65 million in buyout fund Riverside Micro-Cap Fund V.
• The Virginia Retirement System committed $350 million each to three managers for global tactical asset allocation and $300 million in a global equity long/short hedge fund.
• The Louisiana School Employees Retirement Fund invested $125 million in a mortgage-backed securities fund and $75 million in a distressed debt fund. It also hired two managers to run $400 million in global multisector fixed income portfolios.
• The Ohio State Teachers’ Retirement System just committed $225 million to two buyout funds and $150 million to a middle market private equity fund.
• The Illinois Municipal Retirement Fund committed $75 million to a special situations credit fund and $40 million to an early stage biotech strategy.
• The University of Houston System invested $7.5 million in a “secondaries fund” that invests in high quality private and growth equity funds. It also invested $5 million in growth equity investments in the lower middle market with a heavy focus on enterprise software, internet and technology-related services. It also invested $15 million in a long/short equity fund.

The consultants to these funds are quite imaginative.

Conclusions

 I return again to the Angell quote: “One of the open secrets of the financial-services world is that we’re also in the entertainment and gaming industry.” It appears to be valid. And indeed, the consultants and managers they recommend are doing very well by their actions.

I close with a quote from Warren Buffett:

“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”