Data Picks Investments, Stories Sell Them
How investment products are created and sold now is the reverse of two decades ago.
Bloomberg, January 11, 2019.
Not too long ago over a dinner with a mix of younger investors and old timers, the topic of mutual fund marketing came up. All of the many ways funds used to be marketed in the bad old days were laughed at; the heavy emphasis on numbers — this fund was the best performers in its class, that fund was ranked number #1 on ABC list, our fund family has been top 10% for the past decade — was very much part of the sales methodology.
The irony is how much we have since learned — about factors and sources of performance, about the impacts of human behavior and decision-making under uncertainty. Its a very different investment world today.
In the old days, we invested by Narratives and marketed by Data. The new order has reversed that order, with quantitative analytics driving portfolio creation and narrative story-telling selling them . . .
That led to a fascinating discussion of examples of this exact phenomena, as to what an amazing reversal this was (and why).
Back then, if there was a way to apply use ranking numbers to persuade investors to buy a fund, some fund was sure to find it. It gave the entire industry a patina of mathematical respectability. The irony was that the process for assembling portfolios relied on a whole lot of story telling. Sure, there was some math involved, but narratives dominated.
I did not want to include anecdotal examples in the column because, well, they are just anecdotes. But I am happy to share them here if only to use as examples of the reversal between how narratives and data are deployed.
The first example is my favorite version of the narrative basis for stock selection. The company is Iomega, a small disc drive maker that was going to revolutionize the storage and PC industries.1 The best part of the story was how people who lived near the company factory in Roy, Utah, would do drive-bys to see how crowded the employee parking lot was on weekends. If it was full, the company was obviously running double shifts to meet demand! Here comes a ton of future profits!
A newish website called the “Motley Fool” was a big enthusiast of the company. If you are old enough, you might remember the early days of the message boards. Speculators freely shared intel about their favorite companies.
The best part of the story was how people who lived near the company factory in Roy, Utah, would do drive-bys to see how crowded the employee parking lot was on weekends. If it was full, the company was obviously running double shifts to meet demand! Here comes a ton of future profits!
Only, as it turned out, not so much. It was instead narrative story-telling, filled with all of the usual wishful thinking and bias inherent to the genre. Investigative journalist Herb Greenberg, an early skeptic on the company, recognized the deeper problems with the tale. Writing in Fortune, “Wrath of the Iomegans” he astutely observed the narrative tale was “also the story of the Internet, and how it’s changing the way individual investors are exchanging ideas and linking up to get the upper hand on institutions.”
Now contrast that with the modern era: Davis Nadig gave the example of the WisdomTree Japan Hedged Equity Fund (DXJ).2 It is essentially an indexed Japan holding, assembled in the usual manner. It did okay as a fund, putting up decent numbers but attracting only modest capital. The holdings are based on an index that results in a portfolio of dividend-paying companies, incorporated in Japan, traded on the Tokyo Stock Exchange, deriving less than 80% of their revenue from sources in Japan. Thats a pretty straight forward quantitative screen (e.g., Data).
Once Japan began their own version of QE/ZIRP (Abenomics), Wisdom Tree marketed the fund via a simple narrative: “Own Japan without the Yen.”
The story was successfully used to sell the fund, attracting about $5 billion dollars in capital. For an ETF that is a giant win.
The reversal of how funds are created and marketed is a meaningful shift. Understanding it might help you better know what you are buying and why . . .
1. Narrator’s voiceover: “It didn’t.”
2. DISCLOSURE: Our firm RWM owns DXJ in client accounts, I am also a client of the firm; so I own this as well.