“Information is the resolution of uncertainty.” Information Theorist and MIT Professor, Claude Shannon
In a world filled with texts, tweets, emails, blogs, voicemails, podcasts, not to mention actual in-person meetings, how can investment committees ensure they are effectively utilizing these sources of information to improve their long-term investment outcomes? Throughout this paper, we will explore ways in which committees can leverage and streamline the plethora of information they receive, focus their discussions and decisions, and hopefully, improve their returns to support the long-term missions of their institutions.
While serving on a panel at the Philadelphia CFA Society Endowment and Foundation Conference, I heard a telling comment from the trustee of a major participating institution. The trustee noted that it was difficult for him to know when, and if, the institution was on track to meet or exceed its long-term investment goals. The number of asset classes, managers and vehicle types in the portfolio had become so complex that it made him long for the days of a simple stock and bond portfolio. He had the utmost confidence in the diversified portfolio that he and his fellow trustees had created, but the manner in which he reviewed the data, and even the data itself, made it hard for the committee to focus their attention and decision making.
While the investment industry has spent decades improving reporting and communications practices, the improvements have led to a litany of statistical data points being made available to investors without always focusing on the real value of these additional pieces of information. Reporting packages have literally taken on a life of their own with hundreds of pages now available to slice and dice the data from the portfolio. The unfortunate consequence is that most committees are now inundated with performance and portfolio allocation information that could be submitted as a doctoral thesis rather than a foundation or endowment’s investment review.
To compound the problem, the average investment committee has a finite number of opportunities to gather each year to review the portfolio and make decisions. These groups could certainly meet more than the average four times per annum, but the reality is that most committee members are busy community leaders with limited additional capacity for further engagement on any one board. Thus, it is even more critical to spend their valuable time measuring areas of importance.
Michael Mauboussin, in a 2009 report for Legg Mason, characterized this process as focusing on the Important Unknowables. In other words, spend the most time on your process and considering the implications of items such as greater volatility in the portfolio and long term asset class trends rather than the “little time” on the Unimportant Knowables such as whether GDP data for the fourth quarter of 2012 was revised downward by 0.1% in the most recent release. This concept seems straightforward, but you would be surprised by the time allocated to such topics in investment committee meetings. If this scenario is now unfolding on your committee or board, how can you develop a better process that still allows the group to glean investment insights, but does not create information overload?