What Doesn’t Get Awarded in the Investment Industry

Like Hollywood and the music industry, the investment industry also feels the need to give out awards. But unlike those other industries, I’m not sure the investment world rewards what’s actually valuable.

Here’s what typically gets awarded:

Exciting, popular investments. Implementing a new sleeve of long-short hedge funds? How impressive! What a proactive way to manage risk yet retain the equity upside. Of course, that’s the promise, not always what gets delivered. No matter, it’s exciting and it gets an award. Nothing against hedge fund strategies, other than the fact that like many popular strategies, they are blindly anointed as superior, before delivering what they promise.

I’ve never seen a firm win an award that implemented a new, low-cost passive strategy. I mean, how old-fashioned and barbaric! Well, some of us in the industry realize that many, but not all, plans would be better off giving up the chase of active/private/complex strategies. However, many egos and organizations require the pursuit of the strategies to justify their existence. Again, the solution is easy: awards based on long-term results, not hopes and promises. Speaking of promises…

Grand proclamations, promises, and forecasts of future action. Net zero by 2050? You get an award, despite making marginal, if any, actual progress toward that goal. New sustainable/ESG strategies? Also award eligible, despite not actually having any tangible evidence to show if the strategies delivered on their promises or the risk/reward as initially advertised. Perhaps we should see how decisions play out before we grant awards.

Size. I know several under-the-radar pensions and endowment funds that put the big plans to shame by delivering better results over the long-term. But alas, that’s not enough. Size and popularity are always better in the world of awards, because the big players have their hand in just about every strategy, and by random chance, something will always be working.

Here’s what doesn’t get awarded, but should:

Being consistent. Consistency is boring yet the key to long-term performance. Not only do the best teams have low turnover, but they are also incredibly consistent at their process. Inconsistency (often referred to as “strategic change”) is celebrated but is most certainly a negative to compounding returns. Investors celebrate action when they should be celebrating inaction. What’s boring and consistent is often what works best, but doesn’t make for great entertainment, nor great awards, so it’s ignored.

Long-term returns. What ultimately matters in the end, but what never seems to see the light of day. Long-term returns are self-evident. Sure, you can nitpick how much risk was taken to generate those returns, but over the long-haul, performance is the ONE metric. It’s boring, however, so it doesn’t make for great conversation. It would be easy and accurate to give awards for rolling 10-year performance figures, which would negate most of the spin, empty promises, randomness, and dumb luck and would be closer to revealing who really should be getting the awards.

As an aside, this reminds me of all the nonsense every time the Ivy League endowment returns get released, and people start hyperventilating about how great the top performing endowment is (despite being at the back of the pack last year) and how terrible the lowest ranking endowment is (despite being at or near the top last year). Most awards are like most investors – chasing short-term performance and crafting a narrative to explain the randomness.

Simplicity. Simplicity is denigrated because the industry is built on complexity. Complexity primarily benefits the ego, not future returns. Many investors would be better off giving up the chase of active/private/complex/high fee strategies because, quite frankly, they’re just not good at it. However, reputations and careers require the pursuit of these strategies to justify their existence. To be sure, active and high-cost strategies can absolutely work. But just like with any strategy, whether active or passive, let’s give awards after they’ve delivered, not before.

What you avoided. We should reward not just what you do, but what you don’t do. Not losing money is just as good as making money. We should reward this. In this case, avoiding major blow-ups is as good of a win as investing in something that works.

This also applies at the organizational level: if you avoided high staff turnover or a board of director’s mutiny, I think that’s award-worthy, because many firms don’t avoid this.

Investing in unpopular assets. I have yet to see an organization get an award for oil and gas investing. Nor have I seen one for a new coal mining strategy. But I bet there’s lots of awards for AI and clean technology investing, however. We should reward what ends up performing over time, which are often unpopular assets at inception. But this is uncomfortable for many, as you can imagine the consternation that would ripple through the investment industry by rewarding fossil fuels and other supposedly “bad” investments.

Some awards are well deserved as there are exceptional people and organizations in this industry. But awards should be like running an Olympic race - you get a medal for finishing the race near the front, not for showing up at the starting line and promising how good you are.