The CFA Institute Research Foundation Board of Trustees met in Minneapolis recently. In conjunction with the visit, CFA Society Minnesota hosted an event which featured talks by Paul Smith, the new CEO of CFA Institute, and Brian Singer, head of William Blair’s Dynamic Allocation Strategies team and a trustee of the foundation.
Smith spoke briefly about his first five months as CEO, focusing primarily on improving the value proposition that CFA Institute offers to its existing charterholders. He stressed the word “standards,” saying that the organization needs to be vigilant in protecting the standards that apply to the awarding of the CFA, CIPM, and Claritas designations. In addition, in his estimation, CFA Institute must continue to be outspoken in improving how the investment industry operates and how professionals meet the needs of their clients.
The latest event in the Distinguished Speakers Series, Singer’s presentation challenged the entrenched orthodoxy of today, which he said is due in part to the success of the CFA program. The foundation of that orthodoxy is Modern Portfolio Theory and related ideas, the assumptions of which Singer called “inherently yet quaintly stupid.”
He urged the attendees to consider the traditional notion of equilibrium versus the operation of a complex adaptive system. One is static, the other dynamic. One linear, one not. One characterized by complete information, no errors or biases, and no “endogenous novelty” – the other featuring incomplete information, plenty of errors and biases, and differentiation, selection, and amplification effects that cause distortions that aren’t immediately corrected.
When asked which they thought represented the market environment in which they work, audience members voted overwhelmingly for the latter. However, even though that is his thesis, Singer said both perspectives are important to understand if you are to be successful as a professional.
Singer disputes the notion that the fundamental value of an asset is reflected in its current price, but rather believes that fundamental value serves as a gravitational force for price over time. Therefore, he thinks that a short summary of a sound investment process involves three basic questions: Where do prices differ from fundamental value? Why do prices differ from fundamental value? How can those value/price discrepancies be captured?
While he talked about the hot topic of Greece to illustrate how his team uses game theory to assess the objectives of geopolitical (or market) players, perhaps Singer’s most interesting commentary concerned the structuring of his organization versus others.
He eschews the traditional approach, where analysts seek more and more information and then try to sell their ideas to portfolio managers, thinking that it leads to behavioral errors and a torturing of data in search of an answer. Instead, he wants his group to create “deductive frameworks” that don’t look like the decision tools that others use. For one thing, he says, in contrast to others, “We don’t need that much information.”
The key is to create a structure in which to organize information that focuses on the most important elements of a decision – and to staff the organization in a way that brings diverse points of view to the table. That means hiring individuals with different cultural, educational, and work backgrounds. Each puts forth his or her opinions privately, in advance of a discussion, so that the range of views within the group is accurately conveyed before debate is dominated by the loudest and most powerful voices.
Singer stressed the importance of being clear about the information at hand prior to making conclusions. What is fact and what is opinion? We can lose sight of the facts, because the rush to form opinions often overwhelms the process of thoughtful analysis.
In Singer’s eyes, the world of asset management as we know it has evolved on the basis of outmoded theories, no doubt reinforced by the career risk that keeps investment professionals from straying too far from the crowd and the organizational structures that haven’t really changed in decades.
It’s time, he says, to rethink your approach and “put a stake in the ground about what you believe.”