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The most fascinating periods in history were filled with tumult and upheaval. 2023 is no different. When selecting CIO’s 2023 Knowledge Brokers, we asked the candidates to tell us what lessons they learned over the course of their careers and how those insights apply in the latest interesting times.
Among the 10 Knowledge Brokers, nine answered CIO’s question about what specific guidance they could offer, and that guidance falls largely into four categories. Paraphrasing what each said, they counseled patience; stressed the importance of both questioning conventional thinking and of holding fast to your convictions; and, lastly, these professionals advised the need to maintain empathy for and connections with colleagues and clients.
Patience
Samantha Foster, managing director, with Russell Investments, offered a simple and direct mantra. “Optimize, judgement and patience,” she said in her response to CIO’s questions. “Optimize: have a plan and aim toward the optimized end state. Judgement: use judgement, because rarely does the plan go as planned. Patience: have patience, because sometimes arriving at the optimal solution can take longer than planned.”
Along similar lines, Elizabeth Burton, a managing director and senior investment strategist at Goldman Sachs, advised to always make an “opportunity-cost assessment” and noted the similarities between investing and home renovations.
“The result could cost twice as much and take twice as long as you thought it would to complete—are you ready for that inconvenience?” she asked. “If it is worth it, prepare to have more liquidity and flexibility than you anticipated and be prepared to have to pivot on the outcome you thought you wanted. You’ll want to make sure you still get a finished kitchen, even if the oven has to be in a different place.”
Bill Ryan, a partner in and the head of defined contribution solutions for NEPC, reflected on the value of having patience in the face of change. “Being comfortable with uncertainty and the many things we simply cannot control allows me to maintain focus on the end result for plan participants who put their trust and retirement savings into the hands of plan sponsors and their consultants,” said Ryan.
Rowena Carreon, head of investment advisory solutions at Addepar, highlighted the importance of knowing history and appreciating its lessons. Cribbing a bit from Mark Twain, Carreon warned that, like history, markets also may not repeat themselves, “but it often does rhyme.”
An important lesson in 2023 “has been that market cycles can be long, and although markets can be fast-moving and dynamic at times, investors need to keep perspective of the full historic context,” Carreon said, pointing to interest rates as an example. “Interest rates have increased as they did in the 1990s, and while yield-curve inversion has historically been a recession indicator, the global economy is in a much different state than it was in the ’90s.”
Question Consensus
Tim Filla, a managing principal in and consultant with Meketa, said that while history is important, investors should “always question the consensus or the conventional thinking. This year so far has provided a strong example of the value of questioning consensus.”
He pointed to forces at work in 2023 that make it important to know when to accept that an outcome may deviate from past experience. “I’m not advocating for always being a contrarian, but I believe there is tremendous merit in challenging the consensus, which is often based on the most simplistic analysis or binary assumptions,” Filla said. “The financial markets just don’t work that way, and the rigor of deeper analysis is rewarded over time.”
Carreon pointed to the renewed importance of cash, once derided as “trash” by Ray Dalio, in portfolios. “Cash management is being treated as a critical part of an investment strategy,” she said. “Effective cash management requires an understanding of how to best trade off expected return, risk, liquidity, operational ease and tail scenarios. The impact on portfolio performance between a competitive cash management strategy and a poor one can be significant.”
Stick With the Plan
Allan Martin, a partner in NEPC, pointed to the importance of insight, the knowledge of fundamentals and constantly incorporating new research into the mix of ideas, but also of having the “fortitude to stay the course when short-term disruptions occur and the courage to act when others are in distress.”
“In volatile and stressful times, it is important to remember that a well-reasoned long-term asset allocation plan, appropriately diversified to provide protection in adverse environments, is the best protection against long-term capital loss,” Martin said.
Ryan McGlothlin, a managing director at Agilis, agreed that “most of the time, you should do nothing, and by that I mean: Stick to your strategy.”
McGlothin went on to advocate being confident enough to do nothing. “Mostly whatever is worrying people does not happen. Or it happens, but the impact on financial markets is far more muted, or even the opposite to what was feared,” he said. “Sticking to your strategy and doing nothing different is often the best course of action, but it can be the hardest to communicate and justify.”
For Brady O’Connell, a consultant and shareholder at Callan, said, “Investing is incredibly complex and dynamic, but following simple steps can go a long way to succeeding over time, regardless of the crisis or unique market conditions. Investors that followed their long-term asset allocation targets and rebalanced along the way are better off for having done so.”
As an example, O’Connell looked back one year to the interest rate, economic and geopolitical tensions of October 2022. “With all [the] uncertainty, it would not only have been easy, but also justifiable to reduce risk,” he said. “Equities went on to stage a strong, and widely unanticipated, recovery. Investors that were tempted to de-risk in an uncertain market were punished by foregone investment gains, which, for a long-term investor, can be just as damaging as losses.”
Focus on People
Ultimately, David Sheng, managing director of portfolio advisory with Aksia, said in addition to market savvy and a keen awareness of business conditions, “empathy is critical in effectively working with teams and clients.”
He pointed to the challenges of the post-pandemic world and the importance of understanding the “idiosyncratic human experiences that drive individual motivation.”
“Making it a priority to understand the circumstances around decisionmaking for organizations and individuals is an interesting and revealing aspect of serving as a consultant and adviser,” Sheng said. “Developing tools and an organizational system to stay connected and relevant in an increasingly disparate workplace environment is nontrivial but can be rewarding in being able to better connect the dots and add value.”
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Tags: Addepar, Agilis, Aksia, Allan Martin, Asset Allocation, Bill Ryan, Brady O’Connell, Callan, consultants, David Sheng, Elizabeth Burton, Goldman Sachs, Knowledge Brokers, Meketa, NEPC, Rowena Carreon, Russell Investments, Ryan McGlothlin, Samantha Foster, Special Coverage: Consultants, Tim Filla