I’m just now on my way home to San Francisco after Institutional Investor’s “Asia Middle East Government Funds Roundtable”. And I have to say that of the ten or so II events I’ve attended over the past few years, this may have been the best. Stephen Glover and his team get big props from me for pulling it all together. Good stuff.
The whole event revolved around the management of risk and uncertainty with a view to maximizing long-term performance in government funds. I particularly liked the discussions that focused on ‘uncertainty management’ (as opposed to ‘risk management’). Unlike risk, uncertainty is by definition immeasurable – it’s the ‘unknown unknown’ as opposed to a ‘known unknown’ (the latter can usually be ascribed a probability and then priced accordingly).
Anyway, in keeping with the off-the-record format of these events, I can’t delve too deeply into what transpired or who said what, but I will offer a few of my own personal take aways:
First, managing uncertainty starts with any investor developing a coherent set of investment beliefs that take the organization well beyond traditional financial models and theories. Then, with these beliefs in hand, the investor needs to create a deliberate process whereby those investment beliefs are used to expand the risks taken into consideration in investment decisions.
Second, funds have to develop a dynamic and highly capable organization that can react to the unknown unknowns (9/11, Lehman, Tsunami, Fukushima, etc) when they occur. And, based on some of the more sophisticated funds in the room, this seemed to require four areas of organizational development:
1) Culture (which offers a useful way of communicating the valuable tacit knowledge in an organization from one generation of employees to the next);
2) Smart People (are required to have any hope of success in this business);
3) Deliberate Processes (for making decisions that are credible and accepted by stakeholders); and
4) Sophisticated Systems (in order to know where your portfolio is exposed in real time)
Third, it was noted (and widely agreed) by the long-term investors that it was important to spend a lot of time focusing on the investment decision-making inputs (as above) and spend far less time looking at the outputs (returns). Why? Because many felt that there was simply too much noise (uncertainty) over the long term to use outputs as a reliable indicator of your employees abilities or your organization’s capabilities (even if it is often useful).
I could go on and on about some of the interesting lessons... but my plane is boarding.
So I’ll see you at the next II meeting in Cape Town in March!
