Yesterday’s WSJ had a book review on The Unpersuadables, by Will Storr. It isn’t clear that I have much interest in the book, though the ideas summarized in the review are intriguing.
The reviewer, Michael Shermer, identifies some of the folks highlighted in Storr’s book: unpersuadables, such as David Irving, who deny certain things that most agree with (in Irving’s case, the Holocaust). Storr refers to these individuals as “enemies of science.”
It occurred to me that our industry has such individuals: who, despite overwhelming and objective evidence, refuse to give in. I’ll touch very briefly on three.
The benefits of money-weighting
There are some who simply don’t see any role for money-weighting, save for its use with private equity managers. While they agree that we use time-weighting because the manager doesn’t control cash flows, they fail to see the opposite: that we should use money-weighting in cases when managers do control cash flows.
The only conclusion when debating one of these unpersuaders is that the logic for time-weighting is flawed: rather, that we should simply always use time-weighting! The problem arises, of course, with private equity: we are sometimes told that we use money-weighting then because these are illiquid securities whose values are difficult to discern.
It is frustrating, I can assure you, when devotees of money-weighting, such as myself, attempt to persuade one who simply has no desire to be persuaded.
The fallacy of the aggregate method
I have, on more than a few occasions, demonstrated how the aggregate method is severely flawed as a composite return method. It can provide totally nonsensical results, and even violates the definition of the composite return in the GIPS(R) standards.
But those who refuse to see this dare to suggest that this method is actually the best approach! I think in this case it’s “I don’t care what proof you have, we’ll stick with this position and yell louder to make it sound right!”
The error in asset-weighted composite returns
Staying with the GIPS (Global Investment Performance Standards) theme a bit more, let’s consider the requirement to asset-weight composite returns. Many forget that this was a very hotly debated topic 20+ years ago, when the AIMR-PPS(R) was being unveiled. Two industry groups (the Investment Council Association of America (now the Investment Advisers Association) and the Investment Management Consultants’ Association) argued for equal-weighting, but the framers of these standards refused to budge. At the time, I didn’t give it much attention, and so (like most) was quite comfortable with the decision.
Now that we’ve been at this for over 22 years, many of us have concluded that asset-weighting serves no purpose, and provides a less-than-ideal metric to judge a manager’s performance: the return is, by design, skewed in the direction of the larger accounts’ performance. This return doesn’t report how a manager did “on average.” How does one even interpret what it means? All we know is that it leans towards the bigger accounts.
But try to get this requirement to be changed!
Making progress despite the presence of unpersuadables
We are not dealing with stupid people, as this clever quote by Mark Twain addresses.
Not at all. In the case of performance measurement, these unpersuadables are individuals of high intellect, who are simply unwilling or unable to be open to alternative views.
Perhaps we could alter the caption a bit: Never argue with unpersuadables.” It’s really quite a waste of effort, and isn’t much fun, either.
I hope and believe we can do better. Our little industry is still quite new. We’ve made loads of mistakes along the way: in some cases, we’ve righted them, while in other cases, we still have some work to do. But it’s difficult to make progress when some (especially when they’re in a position of authority) hold steadfast to positions that are, in reality, weak.
I am not about to declare these unpersuadables “enemies of performance measurement.” However, their refusal to be even the least bit open to change doesn’t help.
The Catholic Church took a very long time to agree that the earth revolved around the sun; hopefully, we will see the acknowledgement of better ways in a more expeditious fashion.
I will close by quoting the late U.S. Senator, Daniel Patrick Moynihan who once observed that “everyone is entitled to his own opinion, but not to his own facts.”