A voice of dissent from Down Under and member of the University of Technology’s Centre for Capital Market Dysfunctionality, Gray knows the traps set for asset owners—slick managers, alpha’s allure, boredom—because as a CIO, he fell into them, too.

“There is a famous study of English Premier League goalkeepers showing that 40% of penalty kicks go straight down the middle. So, surely a keeper should stand still 40% of the time? When goalkeepers have been asked why they instead usually leap to the left and leap to the right, they say, ‘I’d be fired if I just stood still.’ And it’s also much more fun to dive.

Those forces are so strong. They explain the asset management industry’s structure: A huge swath of overpaid people not adding any value, but simply extracting rent. It’s worst in the US, partly because of lax regulation, and partly because they know how to sell. Wall Street has great marketers. For US equities, active management fees have actually gone up in the last 20 years: Where are these great economies of scale we were promised? The market isn’t going to change on its own.

In the next five years, I’d love to see CIOs be much tougher on their managers. Never again pay a commitment fee to a private equity fund. Never again. Why not all get together and say, ‘We’re not paying these fees. Drop them by 50%, and then we’ll think about it’? Well, then you’re a communist. What the CIOs don’t seem to understand is that this is a game about power, and they’ve got to assert that power. President Lyndon Johnson was said to have an unerring ability to identify the levers of power; institutional funds have not understood that yet. A few have: Ontario Teachers’ long ago brought private equity in-house, for example.

When I was a CIO, I had a little bit of passive exposure in the portfolio, but not much. Why? Because it’s bloody boring. It’s more fun to travel around and meet managers and convince yourself you can pick them. We all believe we’re well above average in every characteristic. We believe that about picking managers, too, although the evidence is overwhelming that we can’t do it. The best way to compete is to go all passive and let the others fight it out. The British government just recently proposed mandating that local council pension funds passively manage some fraction of their equity holdings. I’m cheering on the Brits—it might set a trend. But managers and consultants are not stupid. They recognize that pressure is building, so now it’s all about tactical asset allocation—switching from one asset class to another.

I’m also pretty critical of ESG—environmental, social, and governance investing. The movement has been taken over, in many cases, by true believers who have forgotten that their sole responsibility to members is financial. The late Joe Dear, former CIO of CalPERS, described investing in green technology as an L-curve—the loss-curve. ‘You get pushed into an investment for the wrong reasons, hang around for several years, and then lose all your money,’ he’d say. Taking your eye off the members to that extent is a dangerous thing to do.

The ESG movement has responded, arguing that it simply looks at risk factors—for example, a fund not investing in tobacco, because eventually governments are going to ban it. But no, it doesn’t have to happen. In the long term, tobacco has always been a good investment. There’s a lot of naïveté. Also, the true believers push people into it, and few will push back, because it’s not politically correct. Recently, I criticized ESG in a debate, and seven CIOs and consultants came up afterwards to tell me, ‘I wish I could say that.’ And I replied, ‘Not only can you, but you should. It’s your responsibility to stand up and show a bit of courage.’

With my beliefs, I’m always on the margins. When my views are occasionally accepted in finance circles, it’s the Groucho Marx problem: I don’t want to be part of any club that would have me as a member. It’s an uncomfortable position, and sometimes I wish I wasn’t on the edge—but not for long.”