One of the things Warren Buffet insists on most is that «allocation is the most important management issue«. Over the years, working on many projects with many financial and management teams, I totally agree with this.
Capital allocation refers to the process of distributing and investing a company’s financial resources in ways that will increase its efficiency and maximize its profits. It is a strategic financial decision made by the chief executive and chief financial officers that is critical to a company’s long-term success
And it is a very dificcult skill in financial teams, And i would add «undervaluated»; effective capital allocation is critical to a company’s success, and it can be complicated.
Allocation refers to «how to allocate your financial resources», specifically how to allocate the free cash flow that your company generates.
From a financial point of view, these free cash flows can be allocated as:
1/ Reinvest in the company
2/ Purchasing another business (M&A)
4/ Share buybacks
The first point can be put in many ways, as «reinvesting» can be thought of as talent, intangible assets, branding, research and development, and so on.
Capital allocation creates lasting value for all stakeholders and can significantly impact a company’s future growth and profitability. For that reason profesional investors want to invest in companies which can reinvest most of their free cash flow in their own business at attractive rates of return.
Art market`s size is aquivalent to all real asset private market, and it is not used by institutional funds in their allocations. This is interesting because it is a large market where large institutional investors do not enter.
The performance of art assets during the first seven months of 2020 was far superior to other assets.
On the other hand, the performance has a high correlation with the developed markets (not so good as a safe haven asset).
We will see how this market evolves in the coming years with digital assets, especially tokens, such as NFTs. It has potential.
There is a common narrative or belief says that only the top 20% of VC funds beat the market (equity stock market indices). Some of the best known Venture capitalists in the world, such as Fred Willson, say this assertion is not necessarily true, that you don’t have to be in that top group because the percentage that beats the market is much higher.
In this recent paper the authors demonstrate that the percentage is 50%, in other words, half of all VC funds beat the market. A simple strategy is a fund of VC funds.
One of the problems is that these investment vehicles are only available to institutional investors. The big problem with VC is liquidity, they are illiquid investments and illiquid markets.
Although if they were fully liquid, perhaps their returns would not be so high. Or not.