Effective Investment Committees

A research project on designing and managing investment teams that improve outcomes and build institutional knowledge.

“Mondays at Blackstone”

L.E. Readers,

This summer my family and I are living in Brooklyn during an unusual sabbatical from in-office work. I am undertaking a summer research project around designing investment teams. I am not certain about the final form this project will take but I am calling on my small, but impressive readership to help me. I have worked in a variety of investment roles in my career, both in outright asset management organizations and also in businesses that involved capital allocation decisions. Invariably, these decisions were made by teams, sometimes through formal committees but more frequently by informal meetings, internal communications, and implicit office politics.

Strategy gets most of the glory in investment discourse. How investment managers uncovered and exploited their strategy is the topic of both study and speculation. Process, in stark contrast to the thoughtfulness of strategy, often arises from habits and inertia. In modern markets, it is nearly impossible to have an informational advantage, costly to have an analytical advantage but within reach to have a behavioral advantage.

Pimco’s famous auditorium

Despite this plain truth, little work seems dedicated to the design and structure of investment teams and collaborative decision-making involving capital allocation. The traditional investment hierarchies are a reflection of this lack of thoughtfulness. In most firms, a quasi-apprenticeship model forms where analysts pitch ideas to portfolio managers, or associates support investment committees of managing directors. Such a structure obviously has merit to the degree that it actually provides mentorship, but does it lead to better investment decisions? Does it improve the performance of the team over time?

Ray Dalio’s Bridgewater Associates famously tracks individual performance down to minute, brutal detail (“Radical Transparency”) but does it generate a framework for how those individuals should work together? Whether you are a single manager, a small team, or a massive investment organization, the impact of individual performers only matters to the extent that their best contributions survive the prevailing investment committee process or lack thereof.

Associates at Bridgewater evaluate each other, evaluating investments

How one defines better investment decisions cannot be neatly defined across all disciplines, but as a starting place, an investment team should:

• Build useful institutional knowledge that can be called upon with relative ease.

• Not have an imperative to action.

• Resist consensus-style decision-making.

• Reward loss avoidance and profit in equal measure.

These are admittedly initial impressions formed by my own experience and conversations with fellow practitioners. They may be misguided or incomplete, but the purpose of this project is to refine these directives. I am not interested in merely a collection of lore about great investors, the goal is to produce an applicable playbook for investment teams.

I am hoping to use my time in New York and this space to document conversations I have with investment professionals across asset classes about working on effective investment teams.

If you are a New York-based investment professional and interested in having an off-the-record conversation about your experience on investment teams please reach out to me at edlewisenterprises [at] gmail [dot] com. These will be high-level conversations, I am not interested in any proprietary information, simply the standards and conventions of investment committees or teams.

Thanks,

Hunter