Natixis recently released the Global Institutional Research Study, which canvassed the views of more than 500 “senior decision-makers working in institutional investment” on the state of their industry and investing generally. The survey offered a lot of interesting information, but what struck me most was the difficulty many investors are still having in reconciling their investment beliefs with their organization’s capabilities to execute strategies and policies based on those beliefs. Here are a few examples of what I mean:
- 61% of investors in the survey said they were worried about funding their long-term liabilities. But then we learn that 73% of private pension funds, 69% of public pension funds and 66% of insurance companies did not include asset liability management in their portfolio construction. Say what, now?
- 64% said they believed inflation would present challenges during the next three years to their investments. But only 23% said that central bank and monetary policy had a significant effect on their investment decisions. Why not? Shouldn’t it?
- 65% of investors said they were more confident than they were a year ago about their ability to manage risk. But 82% of investors said that mitigating the impact of volatility would be very difficult. Volatility isn’t risk... but managing volatility is at least one part of managing risk, no?
- Finally, 60% said they viewed traditional portfolio construction as outdated and in need of a revamp. But then 70% of these same investors said that changing asset allocation was too hard to do. Why?
What I see in this data is an industry that is struggling to come to grips with the new reality of investing in the post-crisis environment. And the big question here is how we can graduate these organizations from a set of beliefs into a set of actions. In other words, how can we facilitate innovation in the institutional investment business? It’s required, but it’s very hard to do.
This is a community that (not long ago) relied entirely on a set of models (CAPM, MPT, EMH, MVO, VAR, etc) that are, today, being set aside. That’s a massive disruption to their business. Many investors are thus faced with operating in a ‘post-modern portfolio theory’ world, but they don’t have the simple tools for this PMPT world that they had for the MPT world.
As a demonstration of the challenge, ask yourself these questions: After two decades of incessant crises, what is it that’s changed about how you think about the world of investing? And, as a follow up, how have you incorporated these new beliefs into your investment process? Are these new beliefs considered in a rigorous and methodical way? Or are they over-laid in a haphazard manner?
This is the challenge that the funds in the survey are facing... and funds everywhere if we’re honest. We think that, over the past few years, we have come to a better understand for how investors should deploy capital. But we still don’t fully understand how we can move these investors away from the comfort of old models into this new world of finance. There’s an execution gap here.
Resolving this execution gap requires sound governance, but it also demands a coherent set of investment beliefs that the Board can use in its resourcing decisions...
