Notes from the Diamond #4: Less Is More
November 10, 2018·2 comments
Harvard's endowment is 40% to 70% larger than Yale, Stanford, and Princeton combined, yet pursues the same performance benchmarks as these smaller institutions. The Cubs spent 108 years losing while remaining consistently profitable, only to discover their competitive advantage lay elsewhere entirely. What happens when institutions define success by comparing themselves to peers whose circumstances bear no resemblance to their own?
• Size creates its own logic. An institution deploying $37 billion faces different constraints than one managing $25 billion, yet Harvard's investment objectives ignore this fundamental difference entirely.
• The comparison game assumes comparability. Applying identical performance standards to institutions with vastly different capital structures, spending needs, and operational constraints produces strategies optimized for nobody's actual situation.
• Success can look like failure to outsiders. The Cubs generated record profits and attendance for decades by measuring themselves against their own standard, not championships. Their fans called them losers while the organization thrived.
• Boundary conditions are immutable, not negotiable. Wrigley's wind patterns made certain roster strategies impossible. Harvard's thirteen thousand sub-funds with different spending needs make unified portfolio management a structural problem nobody publicly acknowledges.
• The cost of peer obsession is invisibility of actual performance. By pursuing goals borrowed from smaller institutions, Harvard obscures whether it's actually succeeding at the task its size and structure demand.
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Comments
Hi David, have you spent any time reviewing FI360 or CEFEX’s IPS practices and guidelines? In case you aren’t familiar with those organizations, they are marketing themselves as the leaders in the fiduciary standard-setting space. In my limited time helping clients implement those standards, I get the feeling they would find your IPS grossly inadequate. Thoughts?
Jason: Thanks for your comments, which are well taken. “Grossly inadequate” might constitute understatement, as I can’t imagine any such arbiter of best practices in institutional investing deeming my bare bones IPS anything other than scandalous. As with so many aspects of investing, the challenge of fashioning agreement on the essential elements of a well-crafted IPS is rooted partly if not primarily in semantics. By my lights, an investment POLICY statement should be concise enough such that all members of the governing body whose actions it governs (investment committee and/or full board) should be able to recite it more or less from memory. This doesn’t mean that other documents governing deployment of the capital in question shouldn’t be created and put into practice, nor that these other documents must meet the standard of brevity (for IPSs) just suggested. By way of example, permit me to quote JFK in his memorable address to the nation during the Cuban missile crisis: “It shall be the policy of this nation to regard any nuclear missile launched from Cuba against any nation in the Western Hemisphere as an attack by the Soviet Union on the United States, requiring a full retaliatory response upon the Soviet Union.” A pretty concise policy statement, we’d all agree, and an effective one, I’d argue, albeit not one that obviated the need for detailed documentation by qualified personnel within the US military of procedures governing the actual deployment of weaponry if and when the US were to come under attack. Thanks again for weighing in. David
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