Innovation in Institutional Investment: Catalysts and …...2016/10/04 · almost certainly be...
Transcript of Innovation in Institutional Investment: Catalysts and …...2016/10/04 · almost certainly be...
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GPC – Stanford University
Innovation in Institutional Investment: Catalysts and Methods
Executive Director
Global Projects Center
Stanford University
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Dr. Ashby H. B. Monk
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GPC – Stanford University 2
Prudent Person Rule
Monopoly over Assets
Poor Compensation
Poor Governance
Consultant Businesses
Herding, Peer Risk
Guaranteed Survival
Career Risk, Capability
Bureaucracy, Resourcing
Misaligned Advice
Innovation is very rare in our industry… with good reason.
Focus on Efficiency Tension with Innovation
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GPC – Stanford University 3
So what!? Do we really even need
innovation?
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GPC – Stanford University
Theoretically, Plenty of Long-Term Capital
$70,000,000,000,000
(Note: That’s actually a conservative estimate. Seriously.)
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GPC – Stanford University
Short termism is endemic
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GPC – Stanford University
Lack of Investment Dollars for Critical ‘Projects’
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GPC – Stanford University
Financial services is capturing too much value…
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… while distorting incentives.
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GPC – Stanford University
The tables are tilted too far in favor of the third party asset managers: • Where manager transparency is difficult to achieve, institutional investors will
almost certainly be “gamed” on fees (Foster and Young, 2010). • Phalippou (2009) argues that the confusing nature of management contracts allows
GPs to charge high fees for low average performance. • Robinson and Berk (2013) show that managers with higher fees do in fact generate
higher returns, but the additional returns are not shared with LPs.
• Lots of papers show the incentives that standard compensation contracts give managers allow them to manipulate returns (see Starks 1987; Carpenter 2000; Bebchuck and Fried, 2004).
Challenge of Traditional Model of Institutional Investment:
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GPC – Stanford University
Let me sum up …
There is A LOT of theoretically long-term capital in the world in pensions, sovereign
funds, endowments, foundations, family offices, insurance companies, and so on
But these long-term investors are investing over shorter and shorter time horizons
This behavior is odd, as it rejects some of the key advantages of a long-term investor (time and scale) and plays into the hands of financial intermediaries (hence the high fees earned)
And this leaves critical projects for the future of humans un-funded
So… yes… we do need innovation in institutional investment.
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GPC – Stanford University
Back to basics: The production function of returns…
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GPC – Stanford University
Looking outside-in a pension fund….
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GPC – Stanford University
Living inside a pension fund….
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GPC – Stanford University
Our research at Stanford is focused on improving the production function of investment for long-term investors, which, we hope, will better align long-term capital with critical long-term projects. Our focus is on institutional-investment innovation that can re-root long-term institutional investors in the real economy: Specifically, this leads us to four categories of research, which we believe will help improve the return production: Professionalization of AOs Re-Intermediation of AMs Conceptual Innovations
Technological Adoption
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GPC – Stanford University
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GPC – Stanford University
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2010s 2000s 1990s 1980s 1970s 1950s/1960s
30
20
10
0
# of New SWFs
3 4 5 8
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Source: Ashby Monk, Oxford SWF Project
? Precautionary savings has become a standardized macro and fiscal policy tool. Countries use commodity revenues, foreign exchange reserves and budget surpluses to set up SWFs for global investments.
Examples: Azerbaijan Botswana
China (SAFE) Hong Kong
Iran Malaysia Norway
Venezuela
Australia Brazil China
(CIC, NSSF) France
S. Korea Russia Qatar
and others
Angola Colombia
Ghana India Israel
Mongolia Nigeria
South Africa and others
Kiribati Kuwait
New Mexico
Abu Dhabi (ADIA) Alaska Alberta
Wyoming
Abu Dhabi (IPIC)
Brunei Chile Oman
Singapore
A large, and growing, blank canvas…
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GPC – Stanford University
“This is the best book I’ve ever read in my life.… a real page turner!” said nobody.
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GPC – Stanford University 17
Blank canvas, yes. Agent for change? Not necessarily…
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GPC – Stanford University
2.0
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GPC – Stanford University 19
Fees and Costs Dis- and Re-Intermediation
Key drivers of innovative behavior today and into future …
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GPC – Stanford University
A new paradigm; pensions actually care about fees? Really?
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New focus on fees is not only affecting asset managers operations… It’s affecting asset owners operations!
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GPC – Stanford University
A better understanding of the fees and costs is akin to a better understanding of the ingredients in your food… we need investors focused on “organic finance”!
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
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GPC – Stanford University
Reaching for yield…
Bad kind of innovation
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
Low Return Environment Using Competitive Advantages
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GPC – Stanford University
Using your unique advantages…
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
Low Return Environment
Data and Tech
Using Competitive Advantages
Unraveling Complexities
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GPC – Stanford University
You may be surprised who gets replaced by robots…
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GPC – Stanford University
Move 37 (Game #2) and semantic discovery:
“That’s a very strange move,” said one commentator. “I thought it was a mistake,” said the other.
“So beautiful,” Fan Gui kept saying. “So beautiful…”
True Understanding of Complexity is coming…
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GPC – Stanford University
Will you survive the robot invasion?
Frey and Osborne study (2013, with 2010 data): 47% of US employment Likelihoods of replacement by machine intelligence in next 10-20 years: Financial Examiners ……………………………………..17% Actuaries ………………………………………………..21% Financial Analysts …………......................................23% Financial Specialists, All Other …………………………..33% Economists ……………………………………………..…43% Market Research Analysts ……………………………..…61% Accountants and Auditors ………………………….........94% Budget Analysts …………………………………………..94% Credit Analysts …………………………………………..98% Loan Officers …………………………………………..98% Brokerage Clerks ……………………………………..98% Insurance Claim and Policy Processing Clerks ……..98% Insurance Underwriters ………………………………..99%
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
Low Return Environment
Data and Tech
Using Competitive Advantages
Unraveling Complexities
Dual Objective Investing New Successful Strategies
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GPC – Stanford University
Wise words from successful impact investors…
“We believe our purpose as impact investors is to earn an attractive return by funding positive transformation. “The best founders want to radically change the world for the better. “ It doesn’t matter whether everyone agrees with the entrepreneur about the world-historical nature of the project – if the entrepreneur seeks an impact beyond his own payday and can convince employees of the same, the project is much more likely to get done. “Early in a company’s life, an entrepreneur can make enough money to satisfy his own needs (though often not much of a return for the investor); to take a company from $50 million to $50 billion requires singular vision and dedication. “Wild-eyed passion is not a bad thing by any means.”
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GPC – Stanford University
Wise words from a successful impact investor…
“We believe our purpose as impact investors is to earn an attractive return by funding positive transformation. “The best founders want to radically change the world for the better. “ It doesn’t matter whether everyone agrees with the entrepreneur about the world-historical nature of the project – if the entrepreneur seeks an impact beyond his own payday and can convince employees of the same, the project is much more likely to get done. “Early in a company’s life, an entrepreneur can make enough money to satisfy his own needs (though often not much of a return for the investor); to take a company from $50 million to $50 billion requires singular vision and dedication. “Wild-eyed passion is not a bad thing by any means.”
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GPC – Stanford University
Wise words from a successful impact investor…
“We believe our purpose as venture capitalists is to earn an attractive return by funding positive transformation. “The best founders want to radically change the world for the better. “ It doesn’t matter whether everyone agrees with the entrepreneur about the world-historical nature of the project – if the entrepreneur seeks an impact beyond his own payday and can convince employees of the same, the project is much more likely to get done. “Early in a company’s life, an entrepreneur can make enough money to satisfy his own needs (though often not much of a return for the investor); to take a company from $50 million to $50 billion requires singular vision and dedication. “Wild-eyed passion is not a bad thing by any means.”
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GPC – Stanford University
`
Wise words from a successful impact investor…
“We believe our purpose as venture capitalists is to earn an attractive return by funding positive transformation. ` “The best founders want to radically change the world for the better. “ It doesn’t matter whether everyone agrees with the entrepreneur about the world-historical nature of the project – if the entrepreneur seeks an impact beyond his own payday and can convince employees of the same, the project is much more likely to get done. “Early in a company’s life, an entrepreneur can make enough money to satisfy his own needs (though often not much of a return for the investor); to take a company from $50 million to $50 billion requires singular vision and dedication. “Wild-eyed passion is not a bad thing by any means.”
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GPC – Stanford University
Impact Alpha isn’t a new concept…
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18% IRR over 40 years 13% IRR since 2004 reform
16% IRR since 2004
“Investing For Development”
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
Low Return Environment
Data and Tech
Using Competitive Advantages
Unraveling Complexities
Dual Objective Investing New Successful Strategies
Collaboration Sharing, Pooling
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GPC – Stanford University 37
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GPC – Stanford University
Fees and Costs
High Return Targets
Dis- and Re-Intermediation
Forced Risk Taking / Over-reach?
Key drivers of innovative behavior today and into future …
Low Return Environment
Data and Tech
Using Competitive Advantages
Unraveling Complexities
Dual Objective Investing New Successful Strategies
Collaboration Sharing, Pooling Platforms
Trigger
New Resource
Innovation
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GPC – Stanford University 39