Sunday, April 19, 2015

Not Equal Anymore

I was one year old when the Civil Rights Act of 1968 was signed into law by President Lyndon B. Johnson.  This law was an update of the anti-discrimination law passed in 1964 and was precisely aimed at insuring that racial housing discrimination would end.  It had been about 100 years (April 1866) since the bloody war that had pitted brothers against brothers and neighbors against neighbors animated, among other things, the final enactment of the first Civil Rights Act of 1866 twice vetoed by then President Andrew Johnson.  This law, also finally enshrined in April 1866, recognized that all citizens were to be afford equal protection under the law.  Two rather ineffective Presidents - both named Johnson and both President by virtue of assassination - presided over the country during two of the most pathetic legislative milestones in the United States - the recognition that People should actually be treated as People!  Regrettably, their less than enthusiastic patronage of these Acts reflected not only their own contempt for those not like the majority establishment, but the prevailing status of the citizens of the Republic.

During the summer of 2014, I had the privilege of hosting a racially and gender diverse weekend gathering at my home.  Anyone who has spent a weekend at the house will attest to the breadth of conversation that attends such gatherings.  Over flourless waffle breakfasts and savory dinners infused with fresh produce from the garden, any topic is fair game.  We discussed our respective upbringings and reflected on the way in which opportunity had manifest in our lives.  And while we all had ample evidence of our individual and collective successes and accomplishments I was intrigued by the unspoken sorrow I heard in some of the voices who clearly carried the pain of a society that still did not adequately account for the disadvantages imposed on persons based on skin color, heritage, and other social "differences".  For a twenty-first century conversation, it seemed to me that we were still living in some barely illumined 19th century paradigm.

So it occurred to me that we should examine the root of the social scourge rather than merely reflecting on its fruit.  And in the ensuing months, I spent a lot of time reading legislative debates, breathtaking oratory from visionaries and bigots alike, and laws allegedly aimed at breaking down barriers of access.  Some of these thoughts have surfaced in my previous writing.  What stood out to me was something that didn't fully gel until February 2015.  We established a glass floor with Civil Rights - not a ceiling. 

Let me explain.

I have been working with the University of Miami Executive MBA program for Artists and Athletes which matriculated its first class, largely comprised of current and former National Football League players, in February 2015.  During the opening weekend, I was invited to address the class and I pointed out two important insights.  First, I described the players as alchemists.  This was not some nostalgic illusion.  Think about it.  To play in the NFL, at some point in your life you have to find a way to take a game and turn it into not only a career but into an exceptionally lucrative proposition.  These gentlemen had all transformed their mettle into gold (some of them adorned with the same).  Second, I observed that each of these men met Plato's definition of genius.  Plato saw the capacity to hold two or more hypotheses simultaneously as the mark of genius.  Think about it.  If you're on the field on Sunday afternoon, you must have: full awareness of 21 analog inputs (not counting the zebras with whistles); complete recall of a week's worth of plays and drills; and, the capacity to engage cognitive and motor function in an instant when none of the above conform to expectations.  The best financial minds in the capital markets might focus on 4 or 5 variables and get most of them wrong most of the time.  A football player has to compute 441 analog functions in a single play with a 300 lb opponent getting ready to crush him. 

None of the guys in the room had ever been accused of possessing either alchemical or genius capabilities.  Why?  Because they're athletes and we "know" what that means.  Oh, and many of them come from historically disadvantaged communities so we "know" what that means too, right? 

What if we don't "know" anything underpinning our callous assumptions?  What if we lived in a world where we saw a disproportionate number of genius alchemists on the field rather than athletes cursed to wind up in the media fueled frenzy about post-professional sports bankruptcies?

I can go on and on about how pathetic our condescending attitudes impact the lives of others.  Or, I thought, I could do something different.

So I did.  Some of you know that I started a quantitative fund with my friend and business partner Bob Kendall.  Using work developed by our team at M∙CAM, we identify companies that have genuine innovative advantage in the marketplace and measure the degree to which the equity market prices this advantage.  When we see innovative companies in which this advantage is not appropriately priced, we invest in them and generate a targeted investment return we call Innovation a®.  In modeled and actual performance, we typically outperform the Dow Jones Industrial Index by as much as 108%.  I decided to take this exact same strategy and do something else.  Many companies voluntarily support minority and women-owned businesses as a meaningful part of their supply chain.  Under the National Minority Supplier Development Council (NMSDC), companies can work to become corporate citizens explicitly committed to economic development through enhanced commitments to diversity.  So, we took the list of all the Russell 1000 companies that have made these NMSDC commitments and integrated them into our quantitative fund to see if innovation and diversity commitment make for a good investment thesis.  Over the past 3 years, while the Dow Jones Industrial Average returned about 37% (Q3 2011 - Q3 2014), our strategy returned a modeled 89% - a 240% out-performance*. 

Which begs the question:  why don't we have a Diversity Quantitative Trading investment product on the market?  No ETF.  No Mutual Fund.  Nothing!  Why?  Because we still are striving for access and totally ignoring the possibility that Diversity OUTPERFORMS our bigotry and contempt-fueled models.  With police shootings, marches, and protests, we're being asked to accept a world where the best we can hope for is "equal access".  And in keeping the conversation in that sphere, we're conveniently supposed to ignore the reality that we're actually harming ourselves by not perceiving the extraordinary benefit of driving racism and any other schism from our behavior.  I'm relentlessly committed to bringing an end to the tyranny of prejudice and chauvinism and to finding a mountain top from which we will see the Promised Land.

*Past Performance is not an indication of Future Results

The backtested performance of the proposed fund allocation is based on a “Dow Substitution” strategy, as disclosed herein.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by MCAM) will be profitable or equal the corresponding indicated performance level(s). Moreover, you should not assume that any of the above content serves as the receipt of, or as a substitute for, personalized investment advice from your financial adviser.

Historical performance results for proposed fund allocation have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the occurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your holdings in the fund will correspond directly to this backtested performance or any comparative indices.

The proposed fund allocation presented here represents backtested results from January 1, 2010 through June 17, 2013. The time periods selected were based on a minimum of 3 years backtesting. The performance of the proposed fund allocation was derived by backtesting our algorithm for selecting best Dow replacements not from actual client or firm accounts. Backtesting of performance is prepared using a computer program that starts with the first day of the given time period and evaluates performance of the recommended securities based on the proposed weighting for each allocation assuming quarterly rebalancing of the allocation.

Backtested performance does not represent actual account performance and should not be interpreted as an indication of such performance. Actual fund performance may also deviate from the index selected for comparative purposes. The index selected was chosen because we are replacing Dow companies and have shown risk that is approximate Beta equals 1 to the Dow. 

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave