Thursday, July 6th, 2017
into the workshop

Sometimes you just need to get yourself into the workshop to explore new possibilities.

Last week, I had the chance to attend the CFA Institute’s Investment Management WorkshopCFA Institute | Here is the website for this year’s workshop. at Harvard Business School.  This was the fiftieth year for the program.  (Amazingly, Wally Stern, one of the founders, has been in attendance all fifty years.)

Billed as “Strategic Decision Making for the Investment Executive,” the workshop brought together investment people from around the world who hold a variety of functional roles in vastly different kinds of organizations.  I think I was the only sole proprietor and was definitely at the “well-aged” end of the spectrum.

There were around seventy participants.  The program uses the case method, with classes led by Harvard professors.  (I appreciated the opportunity to see them in action; it helped me to think about how to lead my own workshops on due diligence and manager selection.tjb research | There will be a workshop this fall.  Space will be limited; sign up on this list if you might want the opportunity to register before the public announcement.)  The twelve cases touched on a wide range of issues, threats, and opportunities for investment organizations.  The attendees were divided into small groups that met before class to discuss each of the cases (which required a lot of individual preparation before arriving at Harvard).

The cases covered situations involving institutional asset owners, activist investors, private equity firms, quantitative investors, robo-advisors, hedge funds, and other organizations.  The disruptive force of technology was a persistent theme.  In addition to the players in the game today, when will the big disruptors (Amazon, Google, Alibaba, etc.; after all, they know everything about our preferences) enter the fray?

It’s clear that traditional fundamental investment organizations are being squeezed by beta providers and factor harvesters on one side and concentrated alpha generators on the other.  One of the few shortcomings in the content of the workshop was the lack of a case about an organization that finds itself stuck in the middle of those trends.

Some other key ideas:

~ “Alpha is scarce and it moves around.”

~ When we talk about creating value (or unlocking it), are we talking about short-term value or long-term value?

~ Perhaps most importantly, investment organizations have “hungry clients” but face a market environment where the standard goal of generating real returns of five percent for those clients seems like a pipe dream.

Given the huge shift to passive investing that has occurred since the financial crisis, the big index providers were discussed extensively.  Is this just another wave in the ebb and flow of investment popularity (albeit a big one)?  What happens to price discovery in the markets and what kinds of opportunities are created?  How should passive firms be voting proxies (or should they)?  And is much of the build-up in assets we’ve seen just a disintermediation of asset managers by investment advisors looking to protect their own business models?Nerd’s Eye View | Here’s a piece by Michael Kitces on that topic.

There were times when the people profiled in a case faced a difficult choice and issues of reputation crept into the decision making process.  One attendee observed that if things are being done for reputation’s sake, the client’s interests are probably taking a back seat.  Conflicts of interest and agency issues are everywhere you look.  In an industry that’s facing transformation, which decisions will be made in the interests of clients and which will be made in the interests of their agents?

One of the most fascinating discussions concerned Harvard’s own endowment.  We could have spent the whole week on it.  After a decade of much change (and much hand-wringing), a new leader is in place.The Harvard Crimson | This story provides some of the background.  In my opinion, a huge roadblock for the endowment is a basic human problem:  peer pressure.  Despite it being the largest academic endowment in the world, with a storied history and an incredible network of alumni and experts that it can draw upon, it can’t escape comparison with Yale in particular and the rest of the Ivies.  That impedes good long-term decision making.

Each evening there was a guest speaker of note.  Rob Kapito of BlackRock emphasized how the best firms reinvent themselves and how difficult that is to do, given that clients praise consistency over improvementthe research puzzle | In my speeches and in writing, I have railed against the trap of “consistent and repeatable.” and lucrative margins and compensation make the top brass lazy.  (He dangled an important question:  “Who is going to change the revenue model for our business?”)  Jonathan Lavine of Bain Capital said, “The fact you made money on something before is completely irrelevant.”  (That stood in stark contrast to many views expressed in the case discussions, which were based upon what has worked.)  And Jeremy Grantham of GMO cautioned us to think more broadly than we often do, that “when you know everything about an industry, you can’t see how other things look in comparison.”  We need context beyond our own little world.

A session on replicating private equity was the only one that didn’t use a case that had been published by Harvard, but instead focused on a research paperHarvard Business School | An earlier version of the paper can be found here. presented by the author, Erik Stafford.  It challenged a lot of the perceived notions about private equity and surfaced the awkward issue of how the real volatility of the strategy is conveniently disguised, making “everybody happy,” if not truly honest about the risks.

Stafford started with this introduction:  “We often develop a framework and we start looking at the world through that framework and get comfortable with it.”  Yes we do.  (Much of my work involves helping organizations to identify frameworks that might be frayed and outdated.)

The faculty chairs of the workshop (Luis Viceira and André Perold) were particularly adept at working the room in ways that lived up to their introductory theme:  “A good case has no answer.”  The journeys that they and the other professors led us on stopped in some unusual places.  After a while, in advance of a case, I started wondering, “Where will we go with this one?”

It’s no secret that success in the business comes down to people.  Four days spent together from early morning until late at night offered me the opportunity to observe how the participants approached ideas (in the classroom and in my small group) and to meet many people during the networking times and learn about their work.  You can’t help but come away with an appreciation for what others can bring to the table — and for the need for good leadership to tie it all together.

I heartily recommend the Investment Management Workshop, as one way (among others) to challenge your thinking.  We need to go into the workshop every now and then, sometimes by ourselves and sometimes with others, to discover what we can’t see when caught up in our day-to-day responsibilities.