President’s Letter

I’ve always thought that our capacity to understand, with true, actionable clarity, the changes that are occurring around us always lags by a few inches, or yards. We deal with this the best we can. Many of us are in professions where we need to have a measure of certainty about things so we develop the language to define reality. But the fact is we lag reality. That’s actually a good thing.

I call it the “reality gap.” I believe that that “distance” gives us perspective. And perspective gives you the opportunity for analysis and more importantly, reflection. Reflection is not navel gazing. It’s using experience, and insight, to make purchase on meaning, to learn, and share that learning. So, do all this right and reality gaps are really great opportunities.

What are the big changes we’re seeing that include such gaps? Here are three:

    Asset Management is Changing: With risk free returns so low (thank you Federal Reserve) and the performance of listed equity so strong now (again, thank you Fed), for so long, the world of asset management is in a curious situation. Investors need higher returns but are mindful that listed equity may have run its course and they therefore also feel the need to de-risk.
    Money always finds its way to flow to better, prospective, returns. That’s the nature of Wall Street. The direction it’s going is to both driven by new product ideas and the ambition to introduce a wider range of alternatives to the private wealth and defined contribution markets. Innovation like this is good. The gap here is about educating investors who have one foot in where they are now and the other in where they know they need to be. The asset management industry is fortunately stepping up to that challenge well.
    The National Football League: How could one very high profile organization get it wrong so fast in so many ways? And this is a body essentially run by 32 billionaires as the Wall Street Journal’s Jason Gay pointed out in a column today. Can 32 billionaires be wrong? Apparently. The gap here is between what the NFL “thinks” it should do to retain public credibility and what public opinion really believes and wants. Public opinion isn’t always right but in this case it is. Look for other seemingly all-powerful, do no wrong institutions to meet the same fate. This is a great learning moment and it didn’t even have to do with social media.

    The World Reels: Ukraine, Syria, ISIS, Scotland, Iraq, Ebola. . .for anyone over a certain age the convergence of all these crises on the same front page brings back the specter of old world disorder paradigm shifts that led to even more disorder. It’s interesting to observe the process among political leaders as they digest what these events mean, collectively, and what to do about them. The gap here is always about are we reading these situations right, acting fast enough, in the right way, and will our sense of “order” return to its usual reality of general disorder, but at an acceptable level.

    Of course, all of these world events and their outcomes impact the markets, asset prices, liquidity, and correlations between them. It wasn’t so long ago that everything in the world correlated to “1”. We watch today with interest.

 

All the best,

Montieth M. Illingworth
President, Montieth & Company
September 18, 2014

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