There has been a surprising lack of innovation and creativity among institutional investors, such as pensions, sovereigns, endowments and foundations, over the past few decades. Perhaps this isn’t surprising given that most of these funds do not have to compete for their capital in the open market; they usually have a “monopoly” on the provision of investment related services back to the plan sponsor and, as such, aren’t forced to change to ensure survival. Whatever the reason, however, I think this stasis is troubling. It leaves these beneficial institutions in a vulnerable position vis-a-vis the financial intermediaries (which, conversely, have experienced some massive innovations in over the past 25 years).
In order to explore the issue of institutional investment innovation, Gordon L. Clark and I recently wrote a paper entitled, “Transcending Home Bias: Institutional Innovation through Cooperation and Collaboration in the Context of Financial Instability”. As you can tell by the title, we believe that collaboration and cooperation can be important drivers of innovation in this community. Anyway, here’s what the paper attempts to do:
‘We argue that in-sourcing and/or outsourcing the production of target rates of return may not provide senior managers sufficient flexibility to respond to changing market conditions. In this respect, cooperation and collaboration between financial institutions can be seen as a way of opening-up an ‘action space’ for innovation otherwise denied by the norms and conventions of the sector.”
In the paper, then, we explore in some detail the benefits and challenges of peer-to-peer collaboration and describe how it helps deliver much-needed innovations.
Anyway, please download it here. We’d love to hear your comments and critiques, as the paper remains a work in progress.
