By William (Bill) J. Kelly, CAIA, CEO of the CAIA Association.
An apt title that has nothing to do with its homophonic avian, the pigeon. Pidgin, in this case as a qualifier for English, is a simplified way for two people to speak when neither one shares a common language. Think of it as an ongoing exercise in trial-and-error as each party tries (very hard) to get their point across to the other, using the simplest of terms.
I had a free morning last week and I thought I would give some stereotypical retirement pursuits a dry run. After logging 10,000+ steps in the Columbus Circle Mall in overly cushioned Hoka’s that could almost qualify as stilts, I headed over to NYC’s Central Park to feed the pigeons from a shady bench. If this truly is the best of retirement, you can count me out, but I did manage to find inspiration for this post.
It turns out that pigeons are quite indiscriminate when it comes to consumption. While I doled out the cheapest, most commoditized brand of rice I could find (after all, I will soon be living on a pension), I’m certain these birds wouldn’t know the difference between the rice in their gullets and Kinmemai Premium Rice, which costs about the same as pearl lobster—one of the most expensive shellfish you can buy. Absent Pidgin English, or a move toward transparency of product, it turns out that the potential parallels and risks to the democratization of alternatives are quite striking!
Last week there was a report from a large PE shoppe which touted that they are currently “selling $1B a month of (alternative) products to the wealthy” using a 200-person team built over the past five years. There is little doubt that this is good for the general partner and their shareholders, but does asset gathering at this pace accrue equally to the investor in the form of value creation?
I certainly hope so. However, advice, due diligence, tolerance of illiquidity, understanding the differences between IRR and TWR, and knowledge of the tax inefficiencies of these products, are not evenly distributed across all investors.
Crossing The Threshold does an excellent job of making the case as to why democratized access must be part of the individual investors’ total portfolio approach, as a wider range of uncorrelated risk exposures now reside in the private markets.
How then though do we thread this needle?
At a recent CAIA Charter event in NYC, I test-drove an idea that was less novel and more like something borrowed from Australia. I prefaced my remarks with a quick recap of the top ten sovereign wealth funds (SWF) in the world. Cumulatively they represent about $9T of assets and the clubhouse leader is Norway’s Government Pension Fund at $1.7T. The buying power, access, and due diligence of any one of them is nonpareil to anything that the average wealth client could even dream about. Yet, they are all ultimately seeking the same thing: the very best compensation for the investment risks which they have chosen to underwrite.
If scale begets better investment options, why can’t we reverse engineer the IRA space as a starting point, akin to creating a retirement superfund for America? This loosely confederated pool of assets consists of about $14T according to Cerulli belonging to approximately 55 million US households, with each owner deciding (on their own or via an advisor) how to allocate those assets. How wonderful would it be if there was an option to allocate to a professionally managed superfund? If just 10% of these assets opted in, that fund would have $1.4T along with a mandate and a voice as powerful as the largest SWF— 27% bigger than Blackstone’s total AUM or about the same size of the combined AUM of Apollo, KKR and The Carlyle Group. Maybe a solution is hiding in plain sight!
A recent retirement survey courtesy of Blackrock showed almost unanimous consensus from both sides of the aisle when asked if we are facing a retirement crisis, yet only 13% believe that our elected officials have the resolve and priority to get this done.
Sadly, they are dead right on the former and maybe not even pessimistic enough on the latter, and we might just find ourselves fighting the pigeons for a commoditized meal in our golden years unless we find a sustainable way forward.
Let us talk in Pidgin English, find sensible solutions, and bring some of that Kinmemai Rice to the masses.
Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.
About the Author:
William (Bill) J. Kelly, is the CEO of the CAIA Association with 30+ years in institutional asset management in successive CFO, COO, and CEO roles. A former CEO of Boston Partners and one of the founding partners of the predecessor firm, Boston Partners Asset Management, he's a global speaker and advocate for shareholder protection. Bill serves as Chairman of Boston Partners Trust Company and is an Advisory Board Member for the Certified Investment Fund Director Institute, which seeks to bring the highest levels of professionalism and governance to independent fund directors around the world. As a member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators.