An alternative approach to investment management

April 6, 2016

Noted Harvard Business School Professor Dr. John Lintner has this to say on the inclusion of managed futures in a portfolio:

“The results are so compelling that the board of any institution, along with the portfolio managers, should be forced to articulate in writing their justification in not having an allocation to the liquid alpha space of managed futures.”

Managed futures are a form of alternative investment in the hedge fund arena that should be considered by charity boards and investment committees because of their diversification and their ability to reduce portfolio volatility and reduce risk. Managed futures are not alone in offering these benefits. There are many other types of alternatives and hedge funds that achieve the same results. Despite Professor Lintner’s hard-hitting comments, there are few charities that typically have an allocation to these vehicles.

In previous editions of FOUNDATIONS, I have commented on what I call the “DK squared” space. Most charity boards have entrusted the investment oversight of their multi-million dollar portfolios to an investment committee. This committee is usually made up of outside volunteers, most of whom have financial industry experience. The recruitment of volunteers with “experience” is often cited by charity board members as validation that their portfolio is being competently and successfully managed.

Yet, no matter how many financial experts you have on your Investment Committee (IC), the fact is that a typical committee meets only quarterly and for a few hours. Because of these time constraints, I have observed that many charities end up with very simple solutions that use only traditional asset classes like equities, bonds and cash. In many cases, they have tens of millions of dollars in a balanced portfolio with ONE asset manager.

Charities end up here because the IC simply lacks the time or resources to do all the research and due diligence on a broad spectrum of investment managers in the traditional asset class space. Needless to say, these same constraints also prevent the charity from strategically looking at alternative asset classes and the benefits they provide. Time and resource constraints in many circumstances force ICs to recommend solutions from a place where they don’t have all the information. In other words, they don’t know what they don’t know — the “DK squared” space. This is invariably the worst quadrant from which to make decisions.

This is why charity boards should strongly consider providing their ICs with professional assistance in the form of a firm that provides outsourced Chief Investment Officer (OCIO) support services. The OCIO firm does the research and due diligence. It designs portfolios using alternative investment solutions in concert with traditional asset classes and provides regular, independent performance reporting on managers against the peer group universe. As a result, ICs have the information readily available to make great decisions about their charity’s investments.
I hope you find this issue of FOUNDATIONS informative. Don’t hesitate to contact me with any questions or comments that you may have.article-pixel