The Paper Trail: Golden Opportunities

July was a month full of milestones. I celebrated forty trips around the sun, and then a week later my daughter turned six. Somehow the latter has made me feel older than the former. 

I promise I won't bore you with a "40 investment lessons learned in 40 years" post. Rather, I'll just say that more than any other birthday in the past this one has made me even more aware of my own mortality (the loss of my childhood hero Hulk Hogan didn't help matters much) and allowed me to reflect and take stock of what's important in life. 

More importantly, in a week's time I get to celebrate another big milestone - ten years of marriage to my beautiful bride Christie. I can honestly say that in my first 40 years on this planet, meeting her is the single best thing that ever happened to me.

Ok, enough with the sappy stuff. Let's get down to business with the latest installment of The Paper Trail!

July's research roundup features:

• Rearview-mirror return expectations in U.S. stocks
• Emerging markets: with or without China?
• Private equity exit activity 
• The spectrum of infrastructure assets
• Evaluating risk mitigating strategies 
• Commercial real estate opportunities
• Modernizing growth/value classifications
• A return stacking approach to investing in gold
• The evolution of Warren Buffett
• Cyber risk in a catastrophe bond portfolio
• Private asset-backed credit as a direct lending complement
• Tail-end portfolios in PE
• Asset allocation and the AI revolution
• Living with trend following

Is it dangerous for U.S. equity investors to be relying on the rearview-mirror for return expectations?

"In short, US market bulls have been right for 15 years, an exceptionally long time, and they may continue to be right, but the longer historical record is not on their side."

Equity Market Focus: Interrogating the Historical Data (AQR)

Should emerging market equity portfolios exclue Chinese stocks?

"Opting for EM ex-China may moderate the geopolitical and economic risks associated with investing in China, though it also drastically reduces the investable market, given China comprises 32% of the EM index. Additionally, removing China from the index increases concentration in sectors such as Taiwan’s semiconductor industry, India’s consumer market, and South Korea’s stable financial sector. This may lead to periods of outperformance when those industries are thriving, but the greater concentration can also result in heightened volatility."

Why Are Emerging Markets Investors Removing Their China Exposure? (Marquette Associates)

Is the liquidity freeze in private equity finally starting to thaw?

"Private equity exit activity increased in each quarter of 2024 and into the first three months of 2025, providing an encouraging sign that the outlook is steadily improving after a three-year trough."

Liquidity Outlook – Are We Poised for a Rebound? (Adams Street)

What are the different types of infrastructure investments?

"Infrastructure is a dynamic, diverse asset class offering investors multiple entry points along a spectrum of risk and reward. From dependable toll roads to more ambitious green energy platforms, the choices typically reflect investor goals, time horizons, and risk tolerance."

The Spectrum of Infrastructure Assets (Meketa)

Why is it so difficult to evaluate the tradeoffs of risk mitigating strategies?

"Designing truly diversified portfolios often means embracing decisions that might be hard to explain ex-post. Counterfactual evaluation – asking what could have happened and how your portfolio would have performed – necessitates an assessment of paths not taken and paths that might unfold in the future. Such exercises can be difficult to explain to investment boards and other stakeholders, who (like the rest of us) prefer to evaluate outcomes. A dogmatic adherence to historical results, however, can reliably lead down the path of overfitting to a process that would have worked well in the past."

The Ex-Ante Problem - Part I: Deadlocked in the Dohyo (One River Asset Management)

The Ex-Ante Problem - Part II: Long Volatility (One River Asset Management)

Is the tide finally turning in favor of commercial real estate (CRE)?

"Higher interest rates and economic uncertainty have chilled transaction activity and reduced liquidity, creating potentially attractive opportunities for secondary investors who can supply liquidity for RE fund general partners (GPs) and limited partners (LPs)."

Real Estate: Uncovering Value Amid Uncertainty (Neuberger Berman)

Are conventional value/growth classifications outdated?

"This evidence provides strong empirical support for a two-dimensional framework that disentangles value and growth characteristics. By isolating fundamental growth as an independent dimension, we avoid confusing low-growth expensive stocks for true growth franchises, enabling us to more effectively identify firms with genuine economic momentum while simultaneously avoiding persistent underperformers."

Fundamental Growth (Research Affiliates)

Is "return stacking" the best way to add Gold to a diversified portfolio?

"Return stacking transforms gold from an either/or allocation decision to a both/and enhancement, aligning the mathematical
benefits with behavioral realities."

Golden Opportunities: Enhancing Traditional Portfolios with a Gold Futures Stack (Return Stacked Portfolio Solutions)

How has Warren Buffett's investment approach evolved over time?

"Over his remarkable 70-year career, Buff ett evolved the investment framework originally laid out by Ben Graham, adding intangible moats, such as brand equity, human capital, intellectual property, and network effects."

Buffett’s Intangible Moats (Sparkline Capital)

Does cyber risk belong in a catastrophe bond portfolio?

"Cyber as a peril is not without its challenges. It is a dynamic space, with limited historical data, and confidence in modellers will take time to build. While not all funds include this peril, those that do see higher spreads to compensate for these uncertainties."

Beyond the Peaks - Cyber as a Catastrophe Risk (Man Group)

Why is private asset-backed credit (PABC) an attractive complement to corporate direct lending?

"Private Asset-Backed Credit is a compelling evolution in the private credit landscape, offering a unique blend of contractual cash flow stability, structural credit protections, and customizable risk-return profiles. By aligning credit underwriting and covenant structuring to the idiosyncratic characteristics of each asset type, PABC strategies can be specifically designed to perform under stressed scenarios, mitigate downside risk, and enhance return consistency. In a volatile macroeconomic environment, asset-backed credit strategies can provide a resilient and scalable path forward for credit investors seeking diversification and defensible yield."

Private Asset-Backed Credit: How Structural Protections Drive Resilient Performance (Waterfall Asset Management)

Should PE investors be actively shedding their tail-end portfolios?

"Typically, investors justify holding these funds to maturity due to factors such as: lack of liquidity needs; long-term investment horizon; reluctance to sell below NAV; or under-allocation to a given asset class. However, those rationales are increasingly difficult to defend as liquidity pressure builds while invested capital in growing tail-end portfolios has become a bigger drag on overall performance."

No Country for Old Funds (Upwelling Capital Group)

How should asset allocators be thinking about AI?

"Investors should strategically seek opportunities to incorporate AI Creators, Disruptors, Enablers, and Adaptors within their portfolios, all the while maintaining a careful watch on potential disruption risks and the possibility of inflated valuations and overbuilding. Investment success in this new era will require investors to combine deep sector expertise, rigorous due diligence, and a willingness to adapt as the technology and its applications evolve."

Navigating the AI Revolution (Cambridge Associates)

Why are trend following strategies so difficult to live with, despite their clear diversification benefits?

"While CTAs have historically delivered strong overall performance during these distinct periods, the path to those returns has rarely been smooth and was often marked by drawdowns – many sharp, some lengthy or deep or both. Nevertheless, the reactive, adaptive, and self-correcting nature of trend strategies has allowed them not only to respond to these evolving market conditions and shifting macro regimes but to thrive."

Living with Trend Following: Lessons From the Past 25 Years (Aspect Capital)