Some institutional investors — think Seth Alexander at MIT or Robin Diamonte at UTC — already achieve great success that they attribute to putting time into their partnerships. But for the lion’s share of us, there’s room to improve. We can drive value creation by being better partners.
The first thing we need to do is shake the “vendor” culture mentality. Understandably, public institutions have the hardest challenge here, as their structures dictate procurement protocols, vendor approvals, and overabundant bureaucracy as terrifying as a Stephen King novel. So it’s not easy. But we could all benefit from spending less time labeling each other in this client/vendor world and simply treating one another like peers working toward a common goal.
Think about your boss. Do you prefer when he (or she) introduces you as “on his staff” or “on his team”? Words matter.
Step two, I believe, is to start acting like colleagues. After the perception of client/vendor has been altered, we can tackle behaviors. Peers, my comments are for you — but obviously, asset managers have just as much duty to improve. (Surely Chris Schelling at the Texas Municipal Retirement System will be writing on that topic soon.) For asset owners, behaviors such as requesting feedback, holding regular conversations with managers, articulating expectations, and offering support are worth our time.
For example, at Hartford HealthCare we try in every meeting to ask our managers if there’s anything more that we can do to help them. Recently, our star European venture capital manager seized on my offer and asked me to weigh in on the firm’s internal code of ethics. I was happy to do so, and thanks to the request, my oversight (of them and others) became stronger and deeper. This goes both ways: We likewise look to our managers for their feedback on our job performance.
We’re all seeking better outcomes, so the benefits of actively managing the partnerships have to translate to improved results. There are simple metrics for gauging an asset owner’s success here — namely, cost structure and knowledge transfer. If costs are declining while more knowledge is flowing into the investment office, then a win-win partnership is happening.
At HHC during 2019, we moved an incremental 2 percent of our assets into esoteric, opportunistic, niche, and high-conviction manager best ideas for no additional fees — a structure known as direct co-investing. This may not seem massive, but remember that the goal of a CIO is to continually move the needle toward desired outcomes, so every bit counts. As my grandfather would say, you need 100 pennies to make one dollar.
Today we stand at the doorstep of a recession. As much as allocators have an intellectual commitment to being better investors, I’d suggest that positive returns from stupid beta will soon be a distant memory and CIOs will be forced to maximize every resource in their arsenal. There are incremental pennies out there just waiting to be picked up. Developing the right partnerships will certainly make the CIO’s job easier, and better serve our stakeholders.
The fashion world provides a real-life case study. I recently presented a deal to my investment board, which includes investment rock stars Cynthia Steer (retired executive vice president of BNY Mellon), Bob DeAngelo (Eversource’s CIO), and David Roth (of family office WLD Enterprises). We were very comfortable with an existing private equity platform relationship that our partner wanted to expand with a new vertical. So we did it. That unique opportunity in the consumer branding space was a portfolio success (and mutually so) only because the partnership foundation existed.
Everyone in our industry already understands the performance impact of asset allocation and manager selection. But I believe that partnership alpha has been overlooked. We must start having more and deeper conversations about whether we’re in the right relationships and how we’re handling them for better outcomes.
In investing, as in love, relationships take work.
David Holmgren is chief investment officer of Hartford HealthCare, where he leads a team managing $3.3 billion in pension and endowment assets.