The New Fund Order

Crowd Chaser: When Fund Selection Faced a Pandemic

September 05, 2021 JB Beckett/ Oren Kaplan Season 1 Episode 17
The New Fund Order
Crowd Chaser: When Fund Selection Faced a Pandemic
Show Notes Transcript Chapter Markers

Welcome to the New Fund Order. An Orwellian journey into the Darkside, the Frontier and the Fringe of Finance.

We speak with SharingAlpha.com co-founder Oren Kaplan on creating his innovative global platform, the wisdom of the crowd, building community and insights against the backdrop of a global pandemic. In a more distanced world, is SharingAlpha.com the real ‘new normal’?

"SharingAlpha went live in April 2016 and has already become the world's largest community of professional fund buyers.

Mission

  • Sharing Insight on the Many not the Few
  • No single research team can cover the wide range of funds available and thus typically focusing their efforts on a very limited number of funds, those with excellent track record have become blockbuster or 'mega funds'. Consequently, over 95% of the funds lack independent qualitative analysis and don't receive significant flows.
  • Using the power of the internet we are able to scale and offer forward-looking ratings on funds, from our community of professional fund investors, to share insight, to share alpha.
  • Recognising top fund allocators"

Check out more at: SharingAlpha.com

Together with left-field opinion, global market news and latest views, direct from my dystopian bunker. In association with my sponsor Allianz Global Investors (AGI) one of the world's leading active managers. My thanks to my guest Oren.. and you dear listener.

Please LIKE, SHARE and SUBSCRIBE. Please leave a REVIEW and let me know what you think and what topics you would like for future episodes. Until then... stay safe and.. keep it left-field!!

That's 20 episodes, 20 Guests, every 2 weeks... each episode is 25 minutes!

Join the NFO Army Citizen, https://www.patreon.com/newfundorder

Left-field Finance.
#newfundorder

Credits

George Orwell 'Nineteen-Eighty Four', Public Domain 1.0.
Additional Sound effects by Soundbible.com and Zapsplat.com. Creative Commons Attribution 3.0 and Public Domain 1.0. All additional Music used by Silvermansound.com Attribution 4.0 International (CC BY 4.0)

Clip: Taken by audience at World Economic Forum (unattributed) in Davos of Yuval Noah Harari. '  Davos Switzerland 2020: Yuval Noah Harari  Warns “ Rise of Human Enslavement by Corporations and Governments.
“If you have data you don’t have to send soldiers “ Yuval Harari said

He is a free thinker and Nobel Prize wining philosopher.
Link to full interview at Davos 2020
Business and World Economic Forum
https://youtu.be/gG6WnMb9Fho

Davos 2020: Yuval Noah Harari “ Rise of Digital Dictatorships by Corporations and Governments” https://youtu.be/Jguf2RK8e7w


© SharingAlpha logo courtesy of SharingAlpha. Copyright 2021 SharingAlpha. All rights reserved. Music: Samovar Party by Shane Ivers - https://www.silvermansound.com

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Clip Yuval Noah Harari  0:05  
As we enter the third decade of the 21st century, humanity faces so many issues and questions, and it's really hard to know what to focus on of all the different issues we face. Three problems pose existence existential challenges to our species.

Three existential challenges are nuclear war, ecological collapse and technological disruption, we should focus on them. Now. Nuclear War and ecological collapse are already familiar threats. So let me spend some time explaining the list familiar threat posed by technological disruption. in Davos, we hear so much about the enormous promises of technology.

And these promises are certainly real. But technology might also disrupt human society and the very meaning of human life in numerous ways, ranging from the creation of a global useless class to the rise of data colonialism and digital dictatorships.

JB Beckett  1:33  
Salutations Dear citizens as we peer into the new fund order to discover the immutable truth for asset management and wealth managers,

The lowdown from the dark side the frontier on the fringe of asset management fund research.

A podcast for wealth managers fund selectors, distributors and investors. Bring it to you the People's Republic podcast on finance, in association with my sponsor, Allianz global investors, capturing the latest market news, views and interviews with leading minds in our industry.

Allianz Global Investors is one of the world's leading active managers,

Computer  2:24  
market news, 

JB Beckett  2:25  
..and this week's market news is courtesy of the financial services club. They note tech stocks lift Wall Street's to new highs after Feds stimulus comments Apple, Microsoft, Amazon and Google whose tech heavy NASDAQ as those slores and S&P 500 Banking and index falls. DWS probes sparked fears of greenwashing claims across investment industry. Poor data and conflicting standards on ESG open up asset managers to potential claims. Meanwhile, Hong Kong plans new risk controls to prevent Archegos style collapse ...attract dangerously concentrated exposures to stocks has garnered attention of US regulators. UK's FCA says it is not capable of supervising crypto exchange Binance. Company's UK affiliate failed to respond to basic questions says the British regulator. The buy-now-pay-later (BNPL) market has been rocked as Klarna's losses soar as credit defaults double. The white hat hacker behind the $610 million crypto highst returns most money... and lastly Nuveen launches a suite of semi transparent active ETFs tag hashtag new fund order and let me know what stories you want me to follow and what stories you want me to talk about. 

And in these strange pandemic lockdown times. Rest assured that all guests are calling in remotely interview. 

And welcome to the new fund order Oren, it's great to have you on the show. And of course sharing alpha has been running a few years now the TripAdvisor meets Morningstar, great to have you on the show. 

Oren Kaplan  3:53  
Thanks for inviting me. Yeah, great to be here. 

JB Beckett  3:55  
Obviously, for the benefit of listeners, I'm sure many of them are aware of sharing alpha. But what was the I guess the main problem that you saw that needed a crowd based platform? Like sharing alpha? 

Oren Kaplan  4:09  
Yeah, well, the problem still exists. I mean, the way buyers and sellers come together and this industry is super inefficient, really doesn't work for both sides of the table, the fund selectors are frustrated, getting offerings, which are not relevant to them. And the sales guys are also, you know, spending lots of their time speaking to people trying to figure out what they're looking for. So trying to create a digital marketplace was our main target. But before we could offer that, obviously, we needed to bring the demand side on board, these professional fund buyers, and as you know, they're probably the most popular people on earth. So we need to think of something that could be of interest to them. And the main thing that we thought of that could try you know, get their attention would be the possibility of creating a track record for themselves in a similar fashion that fund managers have a track record.

And, yeah, so we build a tool, we launched it just over five years ago, which allows them to create such a track record, they simply go to the platform select the number of funds that they're familiar with, there's over 200,000 funds to choose from, then they're asked to rate those funds that they selected in terms of their future chances of generating alpha. And what we do next is we compare the ratings they've assigned with the actual performance of the funds. And if there's a match between the two between their expectations and what happens in reality, then they receive a high ranking from us. So we, we end up with two separate lists. One is a list of top ranked fund selectors in different countries. And the other is a list of Top Rated funds in different investment categories based on the average ratings of our members. And as you mentioned, it's been labelled as Morningstar meets TripAdvisor by the Financial Times when they wrote about us, which creates obviously a lot of interest from investors. It's the only platform that offers that kind of dimension...

JB Beckett  5:55  
It pulls on a number of things.. it pulls on, I guess, notions of competition, transparency, but also pulls on things like gamification, right, you know, this idea of being able to track your own performance. And I guess the, the end-game here is that we improve some of the behavioural biases that we see in the fund selection community. I've been talking recently with the likes of Bev Shah, Joel Wiggins, and Richard Harris, about things like cognitive diversity, behavioural bias and noise. So thinking about that 'wisdom of the crowd'. Oren, how do you think sharing alpha helps to address some of those issues? 

Oren Kaplan  6:35  
Yeah, so the most popular way of selecting managers or funds is basing it on past performance. Since you know, most of these, these allocators are managing or responsible for other people's money, the safest bet for them is to, you know, pick the funds that perform really well in the past. Although, time and time again, research has proved that it's not just a disclaimer at the bottom of a fact sheet, it's the actual reality that doesn't really work. There's no predictive value in past performance, but I don't blame them for doing so they, you know, they want to keep their day job. And using qualitative analysis using qualitative research is something that does work. Research has proven that there's different parameters that can help identifying future performance of funds. However, you know, the universe of funds is huge. in certain areas, it's 10s of 1000s of funds to pick from so there's, none of the teams out there are able to analyse all these funds on a continuous basis. So there's really a need to come together and share thoughts. And the internet allows that. So that's the platform that we develop, that allows people to basically share their ideas and share their expectations. And we incentivize them, as I mentioned, to do so by ranking the Raiders by allowing them to build up their track record. So the outcome of this is an alternative to the quantitative past performance ratings, we provide the market with qualitative ratings based on a large group, a large group of analysts, sharing their thoughts, and we basically just serve as a technology as an aggregator of all these ideas and expectations with a bottom line rating. 

So it does help in solving this, this behaviour, which is, you know, herd behaviour going after those, those huge funds that that normally reached capacity very quickly, because they perform really well in the past, and not necessarily will generate alpha in the future. So this is a very major issue in the industry, there's over $100 trillion allocated to these different managers. And they're allocated basically, based on a methodology that doesn't work. So we're offering alternatives to that. 

JB Beckett  8:58  
And of course, you know, sharing alpha was already up and running before the pandemic hit the industry. And I guess, in that respect, it became a bit of a Zeitgeist for sharing alpha it was it was perfectly placed as a solution to help fund selectors continue to research Fund Managers without necessarily the benefit of physical proximity, and what ways did you think the pandemic affected fund selectors and fund providers and and how they were interacting and using the sharing alpha platform? 

Oren Kaplan  9:29  
Yeah, yeah. So we saw, you know, the real issue in terms of events that served as a mean not only to have fun and to enjoy yourself, but also to socialise and to network with professionals like yourselves with your peers and to find out about funds that they're looking at, and opportunities, investment opportunities you might be missing so that that option was no longer there. And professionals were still looking for a way to see which funds are recommended, if you like by their peers. And that's exactly the outcome of the rating process on sharing alpha. So they, they were invited to our platform, and more and more of them are using it to see which funds have received, on average, the highest rating and different investment categories. So that's from the buyers point of view from these professional fund buyers point of view, from the fund providers point of view. Again, the main issue that raised was the lack of roadshows. So they were used to, you know, coming and visiting potential investors and meeting them face to face that was no longer possible. So a way to generate leads or generate or create new relationships with, with investors trying to find out, you know, which investors are relevant to them, became very challenging in a world where travel was no longer possible. And that's basically our revenue model. So we generate these high quality leads for fun providers based on the categories that our members are searching for on the platform. So we just do it in a digital fashion rather than physical. 

JB Beckett  11:06  
Do you think the pandemic shifted the balance between, say, the reliance on quants versus qualitative analysis? Do you think those effects might be here to stay? 

Oren Kaplan  11:15  
I'm not sure, I think still the fund selectors, when it comes down to placing an order, you know, investing, especially large amount, I don't think they will be comfortable just using a, you know, a platform that offers them, even the sharing alpha  platform, those offers and a bottom line rating, whether it's based on qualitative or quantitative, they would like to do their own analysis, their own qualitative analysis, at the end of the day, all these different tools that offer ratings and information and different ways of looking at funds is obviously useful. But the end decision is made by speaking to the manager speaking to the investment team, and trying to make sure that they understand the way you know, their their added value, their competitive edge, if you like, and verify all the operational risks and you know, and all the all the different issues that they need to check. So I don't think the industry will go digital 100%, I don't think that will ever happen. Always be this human interaction, especially with the larger investments, maybe for retail investors, that could be a solution. But for those professional fund buyers, the fund analysts, they will need to speak to people. And you know, these different conference calls, services, zoom and the likes, obviously serve as a solution for that.

JB Beckett  12:38  
Through the sharing alpha  platform you're both recording the ratings for, for the funds that are being assessed and rated by the community but you're also obviously storing the data on the the hit rates of the community themselves. When you look back and you look across, does it give you confidence that you're starting to see that crowd effect in action, that you're starting to see that wisdom of the crowd emerging on the platform? 

Oren Kaplan  13:09  
Yeah, I'm a big believer obviously in wisdom of the crowds. My favourite example that it works is the game, 'Who Wants to Be a Millionaire', where in the stats show that 65% of the cases the expert is right, whereas the crowd is right 90-91% of the time. So and there's obviously lots of research about it. So I think, you know, wisdom of the selectors, in our case, is very powerful. It does reduce all kinds of noise and biases, and averages out all kinds of misbehaviour amongst different analysts that fall in love with managers and find it very difficult for them to downgrade them and be open to new managers. So I think, in that sense that, you know, intuitively it works. And we see it from the data. I mean, it's still early days, but we are working now on launching a model portfolio, which will be based on, you know, over 1000 analysts that we have, that contribute to the platform in terms of raising funds and creating virtual funds of funds on the platform. So we have both insights in terms of the average asset allocation at any given time. And the average ratings from our members.

And this is super powerful. There's no other team globally that has over 1000 analysts contributing to this engine, if you like. So this smaller portfolio that we're working on, we're you know, we're very encouraged by it, by the data that we're seeing, and we think it's, it could be a very interesting proposition. 

JB Beckett  14:45  
You touched on earlier about previously, some of these asset concentrations that you and I are, you know, very, very aware of, during our time in this industry, so noting for example, funds like, you know, the Woodford funds, do you think fund ratings, diversify or intensify star manager herding... generally? Depending on your answer on that, what does sharing alpha do differently? Or better? 

Oren Kaplan  15:13  
Yeah, so on sharing alpha, you have the because it's virtual, you have the flexibility are the freedom to really express your true opinion rather than be, you know, in a, in a very rigid situation where you can only invest in large funds or funds that have a very long track record, which minimises the choice to a very small selection of funds. And we see that, you know, there's about, you know, out of the out of the 10s of 1000s of asset managers out there, 20 of them, manage 90%, over 90% of the assets, and 70% of the funds... have less than $100 million under management. So there's a very, very long tail of funds that are neglected. And those funds, you know, again, research has proven have a greater chance. And it's also intuitively, it's quite, you know, you can understand that the fund that is smaller, in many, many, in many situations in many markets has an advantage. But, again, if you're a selector, and you have to invest people's other people's money, and you're working at a very large organisation, that limits your possibilities.. Sharing alpha because it's done virtually, and it's your personal opinion, then you can really express your true opinion, especially, you know, the fact that you are accountable for that, because you are later ranked, personally ranked on the platform, that gives you an extra incentive to go with, you know, to rate highly funds that you think will generate alpha in the future and, and and rate, provide a low rating to funds that you think will underperform even if they are super popular in the market in terms of raising assets. So that's freedom to express your true opinion is unique, and results with a lot of ratings that differ from the traditional past performance ratings. 

JB Beckett  17:17  
Yeah, I think it's has huge possibility in reducing groupthink, which obviously become quite institutionalised within larger institutional investors larger asset owners, and I think absolutely showing up for that as a great solution to that. 

Look before we get into the the fun bit, which obviously is the 10 question rapid fire round. Oren, my last question for you, given that, as you see, sharing alpha has well in excess of 1000 fund raters on the platform, I think over 65 countries, some of those will be listening to the show. So what are the plans ahead for sharing alpha? What would you like to do next with the community? Where do you see the opportunities? 

Oren Kaplan  18:03  
Yeah, so we have presence actually now in 77 countries, it's, it's concentrated in Europe. So about 75-80% of our members are based in Europe, we think that in the next few years, the number of members that we will have from North America and Asia will probably equal those that we have in Europe. So that shift is a huge potential. There's many, many allocators in those areas that have not yet been aware that this, this platform exists. So that's... probably going to be a major change. We have the products in place, we have the you know, the technology that supports it, we have 40 Act funds, we have all these other structures on the platform. So it's possible, it's just a matter of creating awareness in those markets. And as I said, the engine as long as the engine works in terms of getting people to contribute, getting them to continuously update their ratings, update their portfolios, and, and new allocators coming in and also contributing. As long as we have this engine running, then you can generate both,  you can create a marketplace because obviously the providers are interested in interacting with potential buyers, especially those professional fund buyers that are super difficult to get hold of. And you can create an aggregate portfolio... this model portfolio, which is a, you know, a very growing market segment. We think we have, as I said, a very interesting offering into this model portfolio industry, since, unlike other teams, which are probably a handful of analysts that sit somewhere in Geneva or London or New York, that decide on the asset allocation and the fund selection, we have over 1000 people already that contribute to that decision.

So that's that's a huge opportunity. So we you know, we have lots of lots of things to work on. It's it's early days still I think, and we have lots of opportunities in front of us but we're enjoying the journey which is most important thing I guess. 

JB Beckett  20:05  
Great stuff. And so it's time before you go Oren, I'm asking every guest to answer a quick rapid fire round of 10 questions. It's gut feel, one answer. Rapid. Are you ready? 

Oren Kaplan  20:19  
Yep, I'm ready. 

JB Beckett  20:20  
Question number one bull or bear? 

Oren Kaplan  20:23  
I'll go with bear. I think there's some assets are way too expensive at the moment 

JB Beckett  20:28  
Interesting question two.. Bogle or Buffett?

Oren Kaplan  20:30  
I like Buffett, he does you know, besides making money, he knows how to talk about it, which is you know, using humour and all kinds of great anecdotes so Yeah, Buffet.

JB Beckett  20:39  
Question three profit our planet?

Oren Kaplan  20:42  
Planet. 

JB Beckett  20:43  
Question four, divest or engage?

Oren Kaplan  20:45  
Engage

JB Beckett  20:46  
Question five lower cost or better value? 

Oren Kaplan  20:48  
Lower cost I'm a true believer

JB Beckett  20:52  
Question six supertankers are boutiques? 

Oren Kaplan  20:55  
Boutiques I think it comes out of what I just the things I mentioned earlier that boutiques definitely 

JB Beckett  21:00  
Question seven star managers are team players?

Oren Kaplan  21:03  
Team players in sharing alpha, team players 

JB Beckett  21:06  
Question eight, public or private?

Oren Kaplan  21:09  
I'd go with private, but very selectively, so yeah.

JB Beckett  21:13  
Question number. Where am I now? Question number nine, high growth or stable income? 

Oren Kaplan  21:20  
Growth 

JB Beckett  21:20  
Growth there you go. And question 10. My favourite as everybody knows socialism or free markets, 

Oren Kaplan  21:27  
Free markets JB... I'm afraid.

JB Beckett  21:29  
I had no I had no doubts you were going to say free markets.

That just leaves the last bonus round, if you could pick a number between 11 and 40

Oren Kaplan  21:40  
12, 

JB Beckett  21:41  
Question 12: fossil fuels are tobacco?

Oren Kaplan  21:44  
Neither.

If I have to go with fossil fuels, at least they get you somewhere. 

JB Beckett  21:49  
There you go. There you go. And that marks the end of the interview Oren Kaplan, I just want to say thanks very much for coming on. Thanks very much for talking about sharing alpha. I think it's a fascinating journey. I think you've established a great, fund buyer community on the platform. Yeah, just to say thanks again. 

Oren Kaplan  22:09  
Yeah thank you, JB, 

JB Beckett  22:10  
Please don't forget to like and share and subscribe you know, click the subscribe button. A new podcast every two weeks with a new guest. Stay tuned.

A big thanks to you, dear listener for tuning in. Brought to you by my sponsor, Allianz Global Investors. And a warm thanks to today's guest. Legally, I am compelled to remind everyone that all views of this podcast are of course independent, and do not belong to any affiliation or organisation. Just in case that was in any doubt...

Tune in for the next podcast every two weeks from the... 

Computer  22:46  
new fund order. 

JB Beckett  22:48  
Please subscribe, share, like and comment. Let me know what you think and what you'd like covered in future episodes. Until then, stay safe and keep it left field.

Clip Yuval Noah Harari  23:04  
First, we might face upheavals on the social and economic level, automation will soon eliminate millions upon millions of jobs. And while new jobs will certainly be created, it is unclear whether people will be able to learn the necessary new skills fast enough. Suppose you're 50 years old truck driver, and you just lost your job for self driving vehicle. Now there are new jobs in designing software, or in teaching yoga to engineers. But how does a 50 years old truck driver reinvent himself or herself as a software engineer or as a yoga teacher?

Transcribed by https://otter.ai

Market News
Interview with Oren Kaplan
Rapid Fire Round
Outro and Thanks
End sequence