Recently, while working on messaging and investment process definition for a global equity strategy for a New York-based manager, we were staying at the Sheraton Times Square. The hotel was the site of the 2016 National Season Finale for the New York City Dance Alliance. The grand lobby was filled with aspiring dancers from ages 5 to 15. Little girls and teen-age girls were sprinkled everywhere, costumed with false eyelashes, lipstick, face powder and rouge, hair curled and sprayed, bedecked with ribbons and jewels. Sparkling lavender, red, turquoise, gold, silver and pink spandex outfits, and shiny black patent leather dancing shoes adorned all the contestants, boys and girls. I couldn’t help but wonder what did all the make-up, hair embellishments and gilded spandex have to do with dancing? Is it a competition for best costume or best dancing? When I looked up the winners listed by different age groups, no details were provided. I wondered also if winning these competitions were indicative of future success as dancers.
Just as I wonder what all the full-page ads in our asset management industry publications (especially cover-page ads), showing Morningstar ratings, or composite and benchmark returns, have to do with institutional asset management? With every ad showing performance, there is the familiar disclaimer in bold text – Past Performance Is No Guarantee of Future Results. Studies completed by Vanguard and others have concluded that Morningstar ratings offer little insight about expected future relative performance. If past performance and ratings provide unreliable direction on future success, why do we continue to spend so much time showcasing and evaluating historical returns relative to benchmarks and peers?
Why not focus instead on what does matter? I found Gretchen Tai’s article, “HP Lays the Foundation for a New Investment Model,” in the June 2016 issue of Institutional Investor to offer a rational alternative to meeting long-term future liabilities. As former CIO at Hewlett-Packard’s pension plan team from 2010 until her recent retirement, Gretchen had an instructive story to share. With the same skepticism toward forecasting expected returns, volatility and correlations across asset classes as I feel about selecting managers based on benchmark or peer rankings, Gretchen and her team at HP developed a new model for asset allocation, distinct from the traditional mean-variance optimization and from the “endowment” model, evolved from David Swensen’s Yale University model. The goal was to achieve better long-term results relevant to HP’s needs based on more attention and understanding of risk, responsiveness to markets and dynamic rebalancing. Downside protection and cost controls were key elements of the success of the model. She credited former CIO, Ken Frier, and his team, with much of the original innovation, focusing on “We will take risk for the plan when we have to, and we will take risk where the payoff is best. If we don’t need the risk or if the reward is not worth the risk, then we won’t take it.” Check out the full article in the June 2016 issue of Institutional Investor.
I hope that the awards for the dancers are more indicative of future success than benchmark and peer rankings are for managers. I also hope that we as an industry continue to make inroads in understanding how to achieve success for our constituents. Their future and our own future depends on it.
What do you think? How can we ensure deeper understanding of determining the best investment solutions for varying retirement needs? Please share and comment below.
Charnley & Røstvold, Inc., a preeminent marketing consulting firm to asset management firms ranging in size from start-up firms to some of the world’s largest investment firms with over $1 trillion under management. Charnley & Røstvold helps clients with competitive positioning, marketing strategies, key messages, presentation refinements, communications and sales training, consultant relations and client service programs.
Jackie Charnley, co-founder of Charnley & Røstvold, Inc., is a popular industry speaker and author. Jackie serves on the ICMA-RC Board, a not-for-profit company serving the financial needs of over one million public employees. She was also a founding board member of PAICR (Professional Association for Investment Communications Resources).