What Do Investors Do With All That Data?
Ask a CIO #33
A while back, I highlighted how the penny is an anachronism, an arguably outdated relic that costs more to produce than it's worth. It turns out Elon Musk and his Department of Government Efficiency (DOGE) feel the same way.
But now that there is a real possibility of pennies going out of circulation, my nostalgia is kicking in, and I kind of want to keep all the pennies still in my possession. Let’s see how it all goes, I guess?
While DOGE is presumably poring through government spending line items to pass judgement, I want to reassure the asker of this week’s question that LPs generally are not using manager transparency reports to second guess individual positions.1
What do investors want to see in fund reporting? How important is position level transparency?
These are both great questions, and your first question actually comes up a lot. As with other subjective topics, I have to preface my thoughts below with the caveat that these are just my opinions, and mine represents only one viewpoint. Ask 10 institutional investors, and you’re liable to get 10 or more different answers on this topic.2
Most of what I’ll share below only applies to public market strategies. From what I’ve seen, private markets reporting tends to be more consistent across managers and firms. Reports are generally produced quarterly and include full position level transparency.
On the public markets side, I’ve experienced huge variations in how managers share information with investors. Part of the variation, of course, results from different strategies necessarily reporting differently. That said, I do think there are some consistent best practices.
The most helpful public market fund reports tend to include, in no particular order:
Exposures – sector, geography, strategy (if multi-strategy), etc.
For funds investing both long and short, reports ideally show gross long and gross short exposures across each of the categories. It’s not as helpful for investors to see only net exposures.Performance – historical monthly net performance since inception, not just cumulative or since inception annualized.
I understand the rationale behind not showing full performance history on a standard report. Reports can get forwarded and shared, and performance can be misinterpreted without context. But it does feel like a manager is hiding the ball if I have to separately ask for historical monthly performance.
Attribution – preferably broken out by the various exposures listed above.
Again, I understand if managers are hesitant to publish this information in a documented and distributed way.
Positions – at a minimum, reports should include the top 10 holdings, long and short (if applicable). I’ll spoil my answer to your second question by saying here that I think position level transparency is very important.
Manager Commentary – even if brief, commentary around a fund manager’s recent performance, updates on portfolio changes, perspectives on market conditions, and broader outlooks are useful to read alongside the data.
Finally, if applicable, Risk Metrics – position concentration, portfolio leverage, portfolio hedges, etc.
The other debate tends to be around the frequency of reporting. Monthly detailed reports are useful, but in my experience, quarterly detailed reports are just as good.
Now you didn’t ask this, but I’ll answer anyway. What does an investor do with all these fund reports? As you can imagine, investors receive a lot of monthly and quarterly fact sheets. Institutional investors are voluntarily (and sometimes involuntarily) on many manager distribution lists.3
Any single fund report is typically a snapshot in time and doesn’t necessarily convey much. But when the data from fund reports are aggregated over months and years, investors can develop a much clearer picture of how managers take risks and generate returns. And if a manager drifts away from core strengths or changes strategies, that too will generally show up across fund reports.
As for position level transparency, I’ve already noted above that I think it’s really important. Position level transparency helps an investor to validate all the other data shared by a manager.
Generally speaking, investors aren’t interested in nitpicking over portfolio positions. Occasionally, a position in the portfolio might stick out – it might be outside the typical strike zone, it might be unusually large, it might be having a difficult period of performance, etc. – but again, investors typically just want to understand the why behind exposures and risks, not second-guess investments.4
And in certain instances, investors understand that managers might only be able to share limited information. Position level transparency could hardly be expected in situations where a manager is building up positions in the debt or equity of a company, or in cases where transparency could compromise the manager’s ability to execute their strategy.
Overall – and this will come as no surprise – I think investors want data that is organized in useful ways, tracked over time. And when in doubt, more transparency.
Before we wrap up this week, I’d like to wish everyone a Happy Lunar New Year! It’s the Year of the Snake, and I wish you all a happy, healthy, prosperous year ahead.
As always, if you have questions, please send them to: askacio@ivyinvest.co.
Until next week,
Wendy
Maybe that’s what DOGE is doing? I have no idea.
Institutional investors have weirdly strong opinions about some of the oddest things. I, for instance, have a very strong opinion that firms should stop discussing their teams’ collective years of experience. It’s meaningless and absurd!
In many cases, investors take the fund reports and file them away somewhere. I do think institutional investors are starting to evaluate ways to use AI to extract data from the vast quantity of currently “unused” reports. Long-running institutional investment programs with good document storage practices are sitting on treasure troves of data.
If an investor is actually second-guessing investments, that investor is probably not investing, or is considering redeeming if already invested.