“Sharcus is excellent in mixing fundamental, time-tested investment research with practical applications and common sense. He has a commanding and impressive understanding of all asset classes, with a genuine thirst for knowledge. Sharcus mentors our rising next-gen analysts with humility, honesty, and genuine compassion for their long-term career growth. He is a wonderful teammate, with a steady and calm disposition, long-term strategic mindset, and disciplined, thoughtful approach to investment management. Sharcus is also a very funny guy, always creating a light-hearted atmosphere that makes it easy for those around him to engage in conversation.”
—Sam Gallo, CIO, University System of Maryland Foundation
For Sharcus Steen, CAIA, recognizing how biases and aversions play into decisionmaking is key to understanding investments.
As an undergraduate at Stanford University, Sharcus Steen studied psychology and economics, before also getting his master’s degree in sociology with a focus in organization studies. His perspective has come in handy at the University System of Maryland Foundation, where the director of investments uses his behavioral background to help evaluate different investment strategies, build and develop his investment team, and communicate with various stakeholders at the endowment.
“If you don’t understand loss aversion, if you don’t understand herding, if you don’t understand recency bias, availability bias, action bias, etc.—if you don’t understand how certain biases impact your process and decision making, then you are likely to have suboptimal outcomes in the long run,” he said.
Steen has kept busy, since he arrived several years ago, ensuring the asset allocation at the foundation aligns with the stated policy goals. Before the pandemic, Steen spent some time overseas to meet with existing portfolio managers and explore new managers to ensure a portfolio geographically aligned with the stated benchmark. In January 2020, Steen was in Shanghai and Chengdu, looking to explore Asia-based managers, only to find the world drastically altered when he came back to the US. “Looking back, we were right in the thick of it,” Steen said. Though he has not traveled at all since the pandemic started, Steen is looking to get back to business as parts of the world come back online.
The allocator is also pursuing other research projects. Last year, he asked his team to start looking into blockchain and cryptocurrencies and how they would work as part of an institutional portfolio.
Before starting at the endowment, Steen was a senior investment director at Cambridge Associates, working with nonprofit clients. He also worked as a consultant at Ericsson and Booz Allen Hamilton. He was also at Citigroup, working for the firm’s pension fund, as well as its mergers and acquisitions (M&A) group. At Stanford, Steen was a varsity athlete.
CIO: How would you deal with rising inflation and interest rates?
Steen: ‘Dealing with inflation and interest rates’ is addressed most appropriately via the individual institution’s investment policy guidelines, which consider the institution’s resources, return objectives, and risk tolerances.
On inflation, I would argue that most US investors have not experienced periods of long and sustained inflation, and therefore rely on anecdotal information to inform a backward-looking ‘domestic playbook’ for protecting against inflation. Furthermore, the tools most investors would leverage to combat unexpected inflation incur meaningful costs (either opportunity cost or contractual premiums), which some investors are unwilling to pay. Holding inflation protection requires accurately defining the source of unexpected inflation to protect against, establishing conviction that the protection will work as advertised, and embracing the need to educate stakeholders on the implicit and explicit costs of ‘insurance.’
On interest rates, at a high level, I believe there is sufficient evidence that there is a secular downward pressure on rates (broadly speaking) given both the monetary and fiscal actions that are present in the system and may be present in the system for some time given certain financial realities. However, as investors, it’s necessary to acknowledge the trade-offs of abandoning a bond portfolio for upside return considerations.
CIO: What is the best way to bring more diversity to the financial industry?
Steen: Intentionality. Change comes from deliberate action. Diversity is a word that is broadly understood but is not universally defined. In my experience, organizations, teams, and portfolios that are ‘diverse’ got that way through purposeful action.
Generally, the ethos of diversity is broadcast, it has buy-in throughout the organization, it is measurable, and it eventually transitions from policy to culture. A starting point is defining what a ‘diverse financial industry’ means and from that point engaging with key stakeholders who have demonstrated aptitude and intentionality in this area. Two organizations that have had an important impact on my growth and have focused on increasing diversity are the Robert Toigo Foundation and Management Leadership for Tomorrow (MLT). Normalizing active discussions with institutions and their stakeholders about diversity/equity/inclusion efforts and the corresponding progress made will yield positive results.
CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?
Steen: As an investor, I have my personal view, but I must recognize first and foremost the data. Cryptocurrency has been used for years (in various pockets of the world) at this point. Digital asset evaluation and exploration are actively occurring across locales. At the time of this writing, within the last week, Basel proposed banking capital rules for crypto assets, a 401(k) provider is allowing participants to invest in cryptocurrencies, a country has accepted Bitcoin as legal tender, etc. The pace of adoption may not be as fast or as clear as some may expect/want, but investors should not completely dismiss cryptocurrency.
For those investors who move forward with investing in digital assets via direct ownership (or a basket of cryptocurrencies) several notable challenges are present. A chief concern for allocators is the substantial implementation challenge, primarily centered on risk controls (e.g., liquidity, rebalancing, and tracking error management) and identifying investment options/vehicles that meet the investment requirements for their institution.
CIO: How will the pandemic have changed the economic/financial world?
Steen: The pandemic is a humanitarian crisis and should first and foremost be seen through that lens. The impact will be long-lasting on both personal and professional levels. From a pure economic/financial standpoint, it provides a new precedent for the speed and magnitude at which monetary/fiscal support can occur to backstop markets. The lasting ‘change’ we should see is in the rhetoric and corresponding solutions provided for future crises. Specifically, the universal, inescapable nature of the pandemic necessitated a 360-degree view of, and a conversation about, the impact that policy has across countries, income brackets, businesses of varying size, etc. Policies and implementation were successful to varying degrees, but the holistic assessment of disparate impact is something that should prove enduring.
CIO: What place does blockchain have in tomorrow’s financial scene?
Steen: There is evidence that blockchain technology will serve a material role in financial infrastructure, and that there is a pathway toward mainstream adoption. Blockchain technology has disruptive potential not just in financial services, but in health care, manufacturing, and supply chain management. My contention is that exploring investments across blockchain sub-sectors, including base layer protocols, infrastructure (e.g., exchanges, custodial solutions, wallets, brokerages, etc.), and applications (e.g., decentralized finance or ‘DeFi’) is warranted.
CIO: How will ESG change investing going forward?
Steen: The change is happening now. In general, ESG [environmental, social, and governance investing] is neither uniformly defined nor is it uniformly addressed, but the topic is universally discussed. Each institution should address how to appropriately address ESG at their institution. However, as the ESG conversation continues to move forward, institutions will likely evaluate each leg of the ESG stool and determine how these matters impact their investments.
CIO: What asset class or investment troubles you most right now—and why?
Steen: Fixed income (broadly speaking for allocators). The traditional role is as a ballast in the portfolio, and I continue to see a strategic role for it in a portfolio. However, recent performance, low return expectations in relation to other asset classes (especially in the private markets), rising inflation expectations, etc., have made fixed income a difficult conversation for allocators. Each dial an allocator can adjust (sector, duration, liquidity, credit quality, etc.) comes with an associated trade-off that requires ex ante acknowledgement.
CIO: What should be an investment trend, but isn’t (yet)?
Steen: Incorporating decisionmaking analysis and behavioral bias identification within teams. A common phrase in our office is ‘if only investing was about investments.’ When bringing recommendations forward, I want us to not only understand the investment case, but what biases may impact how we view certain investments (recent macro events, peer comments, feedback from a key stakeholder, a friendly IR [investor relations] person, a personal attachment to an investment area, an anecdote that resonated with someone, etc.). Self- and situational awareness for investment decisions, combined with honest acknowledgment of biases and a defined process that rewards a balanced investment approach, makes for better outcomes.
CIO: What investing decision have you made that you’re most proud of?
Steen: My team. The decision to invest time, resources, and energy into developing a high-performing team is critical. The past year and a half have served as a pivotal development point for the careers of each of our team members. Navigating a generational crisis required trust, clarity, resolve, and focus. These traits do not come easy … especially trust. In my role, it is imperative to have buy-in. Buy-in comes not only from trusting that I understand investing, but that I have confidence in my team and willingness to listen and provide feedback. I am lucky to be part of a very talented team and that can make all the difference.
