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Does Anyone Care About Year-Ahead Outlooks?
The tyranny of the call.
At a recent press luncheon held by a major investment firm in Manhattan, a trio of portfolio managers stood in front of a PowerPoint presentation projected onto the restaurant’s wall and proffered vague predictions for the year ahead. As the managers talked, journalists dug into the breadbasket and dutifully scrawled notes into the requisite branded notebooks provided by the firm.
Similar scenes have been playing out at breakfasts, lunches, and happy hours all over midtown since just after Thanksgiving: investment managers hawking their market predictions for the next year to a captive audience of reporters over a hearty steak and a glass of wine or coffee and pastries. These events are generally built around the publication of asset managers’ year-end prediction reports, which aim to call everything from election outcomes to GDP growth for the coming year.
While most journalists are not inclined to say no to a free lunch — or notebook, or selfie stick, or whatever tchotchkes are on offer — they are inclined to question whether the reports these events are predicated on are worth much and, indeed, if they’re accurate.
This year, Institutional Investor hit the midtown coffee-and-lunch circuit and pored over dozens of outlook reports published in 2017 to find out. We selected nine from major investment firms to analyze using specific criteria, like whether they were able to accurately predict GDP growth for the year ahead (hint: only one of the firms that tried to guess got that right) and whether their political predictions for the year came to pass.
Some major firms didn’t qualify for that final list, primarily because their reports could not be easily measured against those of their peers. And to be clear, this analysis is by no means exhaustive. Instead, the goal was to determine whether the predictions firms made for GDP figures, political events, interest rate changes, and potential recessions were accurate.
So are these reports actually useful? The answer, surprisingly often, is yes — if you know what to look for.
There is also the issue of knowing where to look,since these reports are nothing if not ubiquitous. Arnim Holzer, a client portfolio manager and the macro and tail risk strategist at EAB Investment Group, says he starts to feel “call fatigue” at this time of the year.
“There are so many firms that want to be known as very smart. They think that making the right call is the best way to show skill and competency,” Holzer says. “A number of firms want to gain recognition by making the right calls.”
Judging by the length of these reports, many firms think looking smart means writing long. The reports II analyzed were, on average, 31 pages long, with Citigroup’s clocking in at a hefty 94 pages. (Morgan Stanley’s, by contrast, was a compact four pages.)
With the investors interviewed for this story saying they receive between ten and 15 reports each year, that means they have between 310 and 465 pages of content to sift through between Thanksgiving and New Year’s Eve — and then, presumably, trades to put on.
So which reports do industry professionals think are important enough to read, and which ones end up in the circular file? According to Jeremy Lawson, chief economist and head of the Aberdeen Standard Investments Research Institute, what makes a report stand out is when a firm adds something to a conversation, rather than repeating predictions or themes highlighted by others.
“The danger when you’re doing research is that you’re replicating what others have done,” he says. “The importance for us is that we’re offering something unique.”
Holzer also likes a personal touch. “I love anecdotes in these reports,” he says. “When you look at a screen, data is very flat. An anecdote can help show how compelling an investment thesis can be.”
Aside from those requests, what clients really want is for the reports to offer actionable information. By that measure, the firms II analyzed had something to offer, at least in part.
The qualitative predictions made by investment firms in 2017 largely proved correct. Of course, many of these predictions were highly generalized, using words like “maybe” or “could” or “might” to hedge their predictions in case they didn’t come true.
Take, for instance, TIAA’s outlook for 2018. In discussing the likelihood of tax reform in the U.S., its authors wrote: “Tax reform could boost growth levels next year, but both the details of the plan and its likelihood of passage remain uncertain.” Still, TIAA basically got it right: After tax reform passed, the economy grew.
Where these reports run into problems, it seems, is when they try to make quantitative predictions. Most reports analyzed for this story included a prediction for GDP for 2018. While the year has not ended yet, only one was correct as of mid-December.
“No one can forecast the future,” Lawson says. “No one’s outlook is going to be perfect, but what we’re trying to do is use a variety of models and ideas to form our views.”
Richard Familetti, chief investment officer at Ryan Labs Asset Management, a fixed income manager owned by Sun Life Investment Management, notes that he, like many managers, doesn’t turn to these reports for those quantitative predictions.
“I think they’re interesting — not so much from the perspective of where they think the ten-year note will be in a year,” but rather for seeing what the writers think the major themes and big investment ideas will be in the coming year, Familetti says.
But even as investors openly admit they take the hard numbers with a grain of salt, firms can’t resist hedging. Citigroup even included language to remind readers that its analysts aren’t psychic.
“All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events,” the investment bank’s 2017 predictions report said in a footnote.
Given all the qualifying statements — and the low weighting that readers assign to quantitative predictions — some may wonder why firms still bother publishing year-end predictions.
According to Heather Brilliant, managing director for Americas at First State Investments and vice chair of the CFA Institute Board of Governors, it largely comes down to perceived client demand.
“I think they have just become an expected communication tool from a client standpoint,” Brilliant says. “There are a lot of expectations built into the financial services industry that you check in with your clients.”
And clients lap them up. One private-equity executive says that he and his employees do their best to read everything they can get their hands on at the end of the year, and for good reason.
“If everyone thinks a trend will happen, it likely will,” he says. “It’s a self-fulfilling prophecy in a way.”
His firm puts out its own set of predictions for the year ahead. “The main reason we do them is to look smart,” he jokes. It’s worked, apparently: Roughly 80 percent of the firm’s predictions were correct in 2017, he says.
Self-fulfilling prophecies were evident in investment managers’ predictions on whether a recession would happen in 2018. Of the nine reports analyzed by II, none predicted that a recession would happen in 2018. Citigroup, for instance, wrote that there was little prospect of a recession in 2018, while Goldman Sachs’s report said there was a chance for a recession in 2019, but not in 2018. That prediction by and large came true, although market turbulence did pick up in the second half of the year.
Brett Lane, head of institutional advisory services at Deutsche Bank, says he has been discussing the timing and the necessity of year-end outlook reports with his colleagues both at DWS and outside the firm.
“Is there really any significance of December 31 versus January 1?” Lane says by phone. “Why is there a cyclical look at this?”
Brilliant agrees. “Any kind of arbitrary end-of-year cutoff would be too short term for the investing we do,” she says. First State tries to weave longer-term themes into its reports when it writes them, she says.
Not everyone is put off by the cyclical nature of these reports, however.
“A good analogy would be to think about why we have New Year’s resolutions,” says Lawson of Aberdeen Standard. “It’s a natural time for people to be reflective of what has happened and what might happen in the year ahead.”
Holzer of EAB Investment Group says his firm is one of many reflecting on its progress for the year. EAB writes its own end-of-year report, which it began working on at the beginning of December, he says. The firm looks for “quirky correlation changes” or “unexpected moods” to detail in the report, which it releases just before year’s end. Holzer says his main goal in writing his reports is to provide a strong case for EAB’s investment process, rather than specifics on GDP or interest rates.
“I don’t want to be subject to the tyranny of the call,” Holzer says.