Quant vs. non-quant nuance of market woe
I am writing in response to the article written by Christine Williamson in the Sept. 3 edition titled “Goldman Sachs shows numbers behind market woes.” While the article correctly attributes much of August’s performance difficulties to hedge fund deleveraging and high demand for liquidity, it misses a nuance important to your readers.
The acute performance problems experienced by many quantitative managers in August (whether employing traditional strategies or hedge strategies) had more to do with liquidity demands placed upon them rather than the liquidity of underlying stocks. The article accurately shows that the most-liquid stocks within quantitative portfolios performed better than the least-liquid stocks in the recent sell-off. However, the conclusion misses a crucial point.
The sell-off was more about quantitative strategies vs. non-quantitative strategies than it was about the liquidity of underlying stocks. More specifically, if one asks the question — “How did the August performance of the least-liquid stocks held by quantitative managers compare to the performance of the least-liquid stocks held by non-quantitative managers?” — an entirely different set of conclusions emerge. The less-liquid securities held by fundamental managers weren’t hit nearly as hard as their less-liquid, quantitative counterparts. This is mainly because end investors don’t view fundamental managers as a source of liquidity nearly to the extent that they do quantitative managers.
In the final analysis, an overly crowded and leveraged quant trade combined with unique liquidity demands hit quant performance in August with impunity. The big take away is that investors who assumed quants could provide abundant liquidity judged poorly.
ERIK W. OGARD
Director of research, hedge funds
Russell Investment Group
Tacoma, Wash.
Agenda behind pay study
I am somewhat used to the fact that when I read the major print media I am going to find biased and slanted news stories. However, it is taking some getting used to, when paging through business publications, to find the same political hype. In your Sept. 3 edition I stumbled across the so-called story about U.S. CEOs being paid too much. Now I know that is the current rant from the left, but to see it pushed in Pensions & Investments and delivered without any balance or opposing point of view is a little too much.
The study that was cited was clearly done by an organization that has a distinct political and social(ist) point of view, but it was presented with such unquestioned authority that one would conclude it is universally accepted fact. And I love the remedies suggested in the article — (50% to 91%) tax rates. Is this Pensions & Investments or The Daily Worker?
DAVID ADANTE
The Davey Tree Expert Co.
Kent, Ohio
Targeted divestment can work
Edwin Burton’s piece, “Divestment is the wrong answer,” in the Aug. 6 Other Views section substitutes caustic cynicism for a factual analysis. While I share the belief that divestment is impractical and imprudent in some cases, Mr. Burton unfairly lumps the carefully targeted Sudan divestment movement with other nascent divestment campaigns.
Targeted Sudan divestment focuses on large-infrastructure companies, especially those that are essential to the fundamental workings of the Sudanese economy and contribute most to its revenue base. This approach puts emphasis on companies operating in the oil sector, the major source of revenue for the government. With its focus on the highest impact sectors, targeted divestment does not harm those in need.
The government of Sudan has been responsive to economic pressure. When the Canadian oil company Talisman withdrew from Sudan in 2002 in the face of divestment pressure, other oil companies followed. Soon thereafter, the Khartoum regime entered into negotiations that finally ended the country’s 21-year civil war. In 2006, the Sudanese Embassy in the United States spoke out against divestment. A subsequent public relations campaign included a six-page ad in the New York Times promoting Sudan as “a peaceful country” warranting business. These and similar activities indicate the Sudanese government takes the growing pressure for divestment very seriously.
Mr. Burton asserts that companies do not care who owns their stock, and that the transfer of stock from an ethical investor to a non-ethical investor may in fact encourage more negative corporate and government conduct. Indeed, this is a concern addressed by Sudan divestment advocates. Pension funds implementing targeted Sudan divestment legislation must first engage the most problematic companies operating in Sudan, ensuring that only those firms which fail to respond and show no regard for their investors’ ethical concerns are subject to divestment. Furthermore, as the world’s largest investors begin to sell shares in these companies, as was the case with previous successful divestment campaigns (such as the anti-apartheid movement in South Africa), there will be economic as well as reputational incentives for these companies to behave responsibly. The Sudan divestment campaign has already compelled over half a dozen previously unresponsive companies to reform their operations in Sudan.
Mr. Burton deplores the absence of available research on companies that would be subject to divestment. In the case of Sudan, the non-profit Sudan Divestment Task Force produces certified company research, using specific criteria, definitions and procedures to ensure the analytical consistency and integrity of its approach. This approach calls for divestment of companies that:
1) have a business relationship with the government or a government project;
2) impart minimal benefit to the country’s poor and underprivileged; and
3) have implemented no substantial response to the Darfur situation.
Calvert has reviewed the criteria, definitions and procedures, and we find them to be appropriate standards to determine which companies should be targeted for divestment and/or engagement.
In addition, Calvert’s experienced analysts provide analytical and research support, helping to establish which companies are added to the targeted divestment list. This research is used by large institutional investors worldwide. Additionally, several private research firms also provide this service, which is frequently discounted for smaller pension funds.
We have no illusion that divestment alone can end the killing and suffering in Darfur. Diplomatic and other forms of political pressure are essential, and the recent vote by the UN Security Council to deploy a peacekeeping force in Sudan reflects the growing consensus in the international community that direct action must be taken to avert further genocide. At the same time, targeted divestment is a well-crafted tool that not only combines economic with political pressure but enables all citizens and governments at all levels, corporations and their investors to contribute to make a difference.
BENNETT FREEMAN
Senior vice president for social research and policy
Calvert Group
Baltimore
SRI not just ‘movement’
Alicia H. Munnell’s paper titled “Should Public Plans Engage in Social Investing?” summarized by Barry B. Burr in the Aug. 20 Pensions & Investments draws some interesting conclusions.
Her paper states that social investing is a “movement that advocates incorporating social and environmental considerations, as well as financial factors, when making investment decisions.” It also states social investing takes three primary forms: screening, shareholder advocacy and community investing. With the exception of No. 3, these two statements would have been correct 10 years ago. Today, it’s much more.
In the last 10 years social/sustainable/intangible-value investing has gone from a “movement” to an investment discipline that very well could and should be used by public pension plans or any other investment vehicle. It has evolved from a simple negative screening/shareholder advocacy process to a rigorous, positive, proactive, best-in-class, in-depth analysis of how environmental, social and governance issues can directly affect a corporation’s bottom line.
The work in this area, performed by our company, Innovest Strategic Value Advisors Inc., and others has uncovered some startling conclusions that have been completely missed by mainstream financial analysts and rating agencies. The Innovest call, for example, in October 2006, by our banking analyst Greg Larkin, that the entire subprime real estate market was headed for a fall was information that our clients did not get from either Wall Street and/or the traditional rating agencies until well after the fact.
Of even greater interest is that this type of research is no longer limited to the traditional socially responsible investment community. Mainstream institutional investors throughout the world are embracing this approach in greater and greater numbers, to the extent that a recent Innovest client, the head of investment research for one of the top five sell-side global investment bank/brokerage firms, indicated that he expected rigorous research and analytics in this area to account for 20% of investment decisions within the next five years.
While the points Ms. Munnell raised were interesting, it seems at best misleading and, at worst, dangerous, to attach a generic title to an issue that is, indeed, quite specific.
PETER WILKES
Managing director
Innovest Strategic Value Advisors Inc.
