I once gave a lecture to a public pension fund board on ‘the innovative ways pension funds can achieve alignment of interests with alternative asset portfolio managers.’ The title probably could have used some work, but the speech itself went down pretty well. There were a lot of nods and chin rubs. Nobody asked any really tough questions or stood up and whacked a gong midway through. I thought it was a success.
But, afterwards, a nice woman came up and, after a few pleasantries, unleashed a wonderfully interesting critique. This seasoned alternative investment consultant paused — looked left and then right — and then asked me:
“Why are you doing this? I mean, I’m sorry to be asking in such a blunt manner, but ... Why are you bothering with all this? [Hand wave up at the PPT still on the projector.] Don’t get me wrong, I get what you’re saying, but it’s not as if this organization or any of the organizations I work with are actually going to be able to do what you described here today. You know that, right?”
I don’t know why, but this comment from this person in this manner left me a bit stunned. Of course I’d heard this all before, as the governance of many public pension funds would seem to render them impervious to creativity or innovation. But something about this rather nice person (potentially conflicted due to the nature of her work but still coming off as quite sincere) got to me. I think maybe it was because there was clear note of sympathy in the way she looked at me, as if I was suffering from some sort of insanity that would result in my wasting my entire career on trying to change what was ultimately unchangeable.
What I think this woman was saying to me was this: ‘Ashby: You’re right in theory. But in practice, dear boy, you’re wrong.’
It would have been quite easy for me to resurrect the many talking points I have at my disposal to challenge this sort of thinking. But, the truth is, she was pretty convincing. So we had a drink and walked through her logic and thinking in detail.
As it turned out, we actually had almost the same diagnosis for the ills afflicting the pension fund community. She saw all the same problems I did and was right there with me on wanting to push back against much of the excesses and insanities of Wall Street’s fee machine. But where we stopped agreeing was on the medications we’d prescribe for our ill patient.
This individual felt the only appropriate and credible path was one that brought her clients back to simplicity and conservative portfolios. She was taking up the same cause that Bob Maynard of Idaho has been championing: do the simplest thing you can and do it very well. What she took issue with in my speech, then, was the presentation of creative and innovative models of institutional investment. Even though I was arguing for these in the context of in-house teams or seeding new asset managers or forging strategic partnerships, she actually saw this as a recipe for more problems rather than a viable solution.
While I was taking up the mantle of the Canadian model, suggesting that a ‘high-performance pension organization’ was not an oxymoron, she just fundamentally thought a model of this sort was impossible south of the border. She had a point.
Anyway, I was reminded of this experience this morning after reading this article, which basically details everything that this person was telling me was wrong with institutional investment and asset management: over-complexity and non-transparency resulting in massive fees and costs, and ultimately worse outcomes for pensions. It’s a depressing article, but it’s one that you should take the time read.
I admit there’s something really quite appealing about pension funds pulling their money out of hedge funds and putting that money to work in a low cost index fund. It’s not what I’m focused on at the moment, but it’s something I need to be more open to considering. Because at the end of the day, simple investing a la Vanguard (for example) and the in-house Canadian model are just two routes to a very similar destination.
