Unfortunate Realities of the Institutional Asset Management Business

A few years ago I wrote about some of the unfortunate realities of the investment business. They are as follows:

  • All else equal, a talented sales staff will trump a talented investment staff when attracting capital from investors.
  • The products that sound the best are often the worst ones to invest in.
  • There are way too many investment products to choose from.
  • It can be difficult to find good advice.
  • Increased activity does not necessarily lead to better results.
  • Specialists are not always the solution.
  • You don’t always get what you pay for.
  • It’s very difficult to understand the total amount of costs you are paying.
  • The stock market is not rigged, but our emotions are.
  • There are no guarantees.

The institutional investment world of endowments, foundations, pensions, family offices and nonprofits has to deal with all of these same realities, but there are some other features involved when investing in this universe. Here are some unfortunate realities of the institutional investment business.

These funds are dealing with a group dynamic. Institutional funds have board members, investment committees, consultants, money managers, donors, beneficiaries and others all vying for attention. It can be extremely difficult to make wise decisions within a group construct where you have competing egos and goals.

Peer comparisons drive far too many decisions. As part of their tax-exempt status, nonprofits have to make annual financial disclosures that are public record. So anyone can take a look under the hood to see how their finances are doing. The media also reports performance figures for the largest endowments and pensions on a quarterly basis. This has turned institutional investing into a relative game where they care more about what their peers are doing than their own personal goals. Time horizons for many of these funds are infinite, but all they now care about is beating their peers over the latest quarter. It’s madness.

Funds try to look the part. Institutions are labeled “sophisticated” investors because they have so much money. Many try to look the part and make things more complicated than they need to be, often to their own detriment.

Politics matter. When dealing with large sums of capital, wealthy donors and plugged-in organizations, you have to be something of a politician to succeed in this space. Much of your time will be spent campaigning to get things done. Plus, there are a lot of sacrifices that need to be made to try and keep everyone happy.

The organization is more important than investments. The perfect strategy you can’t stick with will leave you much worse off than the good strategy you can stick with. Sticking with any strategy will have more to do with the organizational culture than anything.

One of the (many) reasons this was on my mind this week is because Harvard just announced they would be cutting their staff in half and overhauling the way they manage their enormous endowment fund. As reported by the WSJ, this part of the story caught my attention:

Mr. Narvekar intends to keep Harvard’s portfolio broadly diversified and has yet to determine where Harvard will redeploy the money its internal hedge funds currently manage, a person familiar with the matter said. Longer-term, the endowment’s asset allocations and current line-up of external money managers could change, the person said. Reshaping the endowment’s portfolio is expected to take about five years.

Remaining staffers will focus on Harvard’s portfolio overall instead of on specific asset classes. Mr. Narvekar plans to tie staffers’ pay to the endowment’s overall performance instead of that of their asset class, said a person familiar with the situation.

Harvard’s endowment troubles are a perfect example of the unfortunate realities of the institutional asset management business. They’ve spent the better part of the past decade trying to find a new identity because their original plan wasn’t compatible with some of Harvard’s teachers, students and donors (even though it was wildly successful). Yet it seems that this search has yielded little more than jumping from one rivals’ approach to another.

They’re getting rid of their internal hedge fund structure mainly because of political barriers within the school (even though it was saving them money). It’s also unfathomable to me how it could take five years to reshape their portfolio. I guess that’s what happens when you change CIOs every couple of years and invest heavily in illiquid assets. The time it takes to turn around these battleships is insane.

I’m sure Harvard has some of the brightest minds in the investment industry at their disposal either working for them directly or indirectly through outside money managers. But that doesn’t really matter when you have a dysfunctional organizational culture.

The longer I work in the investment field the more convinced I’ve become that organizational culture is far more important for lasting success than investment acumen. There are plenty of great investors and investment strategies; there are very few great investment organizations.

Harvard to Outsource Management of Its $35 Billion Endowment (WSJ)

Further Reading:
Harvard vs. Yale: Battle of the Endowments

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