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Weekend Reading Feb 1 2013

For the weekend warriors among you, here’s a bunch of news and a few solid research papers. Enjoy your weekend!

Welcome to the weekend. Go 'Niners!

First, here’s some interesting news and stories for you:

- Deep Thoughts I: ‘If we live in a world where trading value is more important than building value, then we have a messed-up economic system,’ so says Management Guru Roger Martin. Agree to agree on that one.

- Deep Thoughts II: ‘If we live in a world most of the financial intellectual horsepower is focused on extracting value rather than creating value (PE)... and winning zero sum games instead of identifying pareto improvements (HF)... then we’re completely and utterly fubared’, so says me. And I hope you agree...

- Post-Modern Portfolio Theory: The 60/40 world of yesteryear appears to be dead in some countries, such as Switzerland and Australia. But it is still going strong in some places, such as Japan. (Nice info-graphic from P&I.)

- Human Resources: Temasek reshuffles its investment team.

- In The Red: The US endowments apparently had a rough year, as aggregate assets were actually down half a percent.

- BFYNHO: Speaking of Jamsostek ... the Indonesian social security fund had a very good year in 2012. Well done.

- Are You Not Entertained? : I love CalPERS’ new blog “CalPERS Responds”. It is so important for these public investors to be proactive about their stakeholder communications; it’s crucial to maintaining a truly long-term investment strategy. For example, the new website even offers some compelling CalPERS-related TV programs to help the 'reading challenged'... So, let me see now, here’s one: "Welcome, once again, to Insight... the program designed to keep you up to date on CalPERS issues." Honey... where's the remote?

- Wishful Thinking: "Locally funded, financially sound."

- Inboxicated: Get more Daily Brief in your inbox. Sign up here. Read responsibly.

- It's gold, Jerry: The State Oil Fund of Azerbaijan is taking delivery of massive amounts of gold. As one does.

- White Knight: France’s sovereign wealth fund is launching a new initiative to support small and medium sized French companies.

Second, I’ve got a couple of new research papers for you this morning:

- Zoltán Nagy, Doug Cogan, and Dan Sinnreich have a new paper entitled “Optimizing Environmental, Social, and Governance Factors in Portfolio Construction: An Analysis of Three ESG-tilted Strategies”. (h/t @Top1000Funds). It's very interesting. Here’s a blurb to whet your appetite: “In this paper, we analyze the effect of ESG ratings on portfolio performance for the period of February 2007 through June 2012, and the effect of ratings changes starting in February 2008... Our study’s main conclusion is that asset managers would have been able to employ ESG factors to attain higher ESG portfolio scores with low active risk, and still achieve moderate benchmark outperformance over the time period from February 2007 through June 2012.”

- Ronald J. Gilson and Jeffrey N. Gordon also have a very interesting new paper entitled, “The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights.” Here’s the whole abstract: “Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle‐Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low cost diversified investment vehicles. A new set of agency costs arise because in addition to divergence between the interests of record owners and the firm’s managers, there is divergence between the interests of record owners – the institutional investors – and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent” – willing to respond to governance proposals but not to propose them. We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toe‐hold position in a potential target.” Awesome.

Anyway, have a great weekend!

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