By Brian A. Schroeder, the founder of OCIO Monitor, a specialty consulting firm that provides due diligence of investment consultants and outsourced chief investment officers.
Like war, golf, football, and chess, investing is a loser's game. Made famous by Charley Ellis, the winner in a loser's game is usually the player that makes the fewest mistakes.
Investing is also said to be a game of overcoming uncertainty. To this end, investors attempt to know/predict the future and invest accordingly. They adjust asset allocation, hire managers, fire managers and react to the constantly changing financial landscape. These are the duties of consultants/OCIOs.
Trying to overcome uncertainty instead of just accepting it invites disaster. More speculation, greater complexity, higher fees, and constant tinkering is a recipe for more mistakes. There are just too many unknown unknowns.
Institutional asset owners sometimes hire consultants and OCIOs that are also constant tinkerers "optimizing" the portfolio in light of current market conditions and changing assumptions. Constant tweaking can sometimes impress the client. "Just look at how much they are doing to the portfolio. They must be pretty smart and add substantial value."
It's actually the opposite. Constant tinkering means they are ipso facto incorporating false beliefs into the portfolio.
If your consultant or OCIO knows what cannot be known and then invests accordingly with discipline, you have a good chance to win the loser's game. Their activity will be much less in terms of tinkering with the portfolio.
The 5 known unknowns concern asset allocation, manager selection, and rebalancing. They are:
- No one knows what the markets will do in the short-to-intermediate term,
- No one knows which managers will outperform over any length of time,
- No one knows which managers will underperform over any length of time,
- No one knows when to hire or fire managers,
- No one knows how to optimally time portfolio rebalancing.
Accepting what cannot be known will simplify your portfolio, better manage expectations, lower fees and costs, take less time to manage and help your portfolio win the loser's game.
About the Author:
Brian A. Schroeder is the founder of OCIO Monitor, a specialty consulting firm that provides due diligence of investment consultants and outsourced chief investment officers. He has over 30 years of investment experience, as both an institutional manager and consultant.
He is the leading objective and unbiased due diligence provider on behalf of institutional plan sponsors. He has worked for pensions, foundations and endowments with assets up to $15 billion. Besides quantitatively determining their value-add and discovering behavioral finance heuristics, he is likely the leading expert in benchmarking and performance reporting transparency. He has been consulted by academics and recently presented to the Securities Exchange Commission’s Division of Exams’ investigators on how to spot performance reporting fraud when conducting routine firm inspections.
Schroeder has spoken at the International Foundation’s Trustee Master's Program, the Investments Institute and the ISCEBS Symposium. In July 2014, Benefits Magazine published his article “Multi-balanced Model: The Missing Link in Investment Approaches?” and, in May 2019, “3 Simple Strategies for Adopting a Passive Investment Consulting Approach” and, in July 2020, “Investing in Response to the Covid-19 Response.”
His analysis is novel by quantitatively scoring the value-add of investment consultants and OCIOs in their five main duties- strategic asset allocation, tactical asset allocation, rebalancing, active manager hiring and active manager firing.
Schroeder has a Bachelor of Arts degree in economics and a Master of Science degree in financial analysis. He served for 3 years on the Riverton, Utah Committee for Economic Development and is a volunteer at the Salt Lake City YWCA.