Reflections on ‘The Investor Identity’

All chocolate chip cookies are made up of six essential ingredients - flour, bi-carb soda, butter, sugar, eggs and chocolate chips. But there’s got to be a reason why your grandma’s recipe tastes significantly better, compared to the hard, generic crunch of the grocery store biscuit.?

In January 2023, Dr. Ashby Monk, Dane Rook and their team of academics from Stanford University published a paper titled ‘The Investor Identity: The Ultimate Driver of Returns.” They too realised that despite chocolate chip cookies being made up of six universal ingredients, the final outcomes can differ widely.?

For them, universal ingredients are applicable to investment teams and superannuation funds, too.?

While all funds have different member bases, FUM sizes, cash flows, internal vs. external investment managers, board compositions, histories, etc…Monk & Rook were able to distil that all investment teams have the following common mechanisms or ingredients for delivering returns:?

• Four Inputs (ingredients): Capital, people, processes and information

These inputs are deployed via common enablers to enhance returns:

• Three Enablers (method): Governance, culture and technology

Monk and Rook outline how understanding the unique characteristics of your Investment team and Fund can provide important context when considering these inputs and enablers. The paper also discusses some short pension system case studies including Australia’s system (our wonderful national asset of Superannuation).?

Their analysis and study suggest Australian funds’ “major investment in technology means solid digital information flows”. On a relative global basis, we can only defer to the deep experience and expertise of Monk and Rook, although the on the ground lived experience of 1886 suggests:

1. Despite investment by many funds, this investment could be more productive. Productive use of Investment Project funds requires experience. We know of multiple Funds that have spent significant amounts yet struggled to meet the whole-of-fund needs of their Chief Investment Officers. Our (biassed) view is fresh, industry-experienced end-to-end thinking and expertise is needed.?
2. Continued investment is needed. Some funds that invested meaningfully 5+ years ago will need to update their platform. Like any asset (such as your home) it needs to be maintained and upgraded to meet the changing needs of investment teams as they mature, particularly relevant as Funds merge, grow and internalise investment management.?
3. A whole-of-fund approach (member-backed thinking) is fundamental. Often Funds have been advised by incumbent market advisors to pursue a siloed approach to their system architecture. Whilst we see the theoretical merit in this, Funds can lack the experience and maturity to integrate data: across public and private markets, through the value chain from Back Office to Investment teams, and don’t address the needs of all consumers (Investments Teams, Member Teams, Regulators, Trustees).

Overall we would contend that there are many funds that have a lot of opportunity to improve their investment data, technology and analytics capabilities. But often the interdependence of systems, process, culture and governance in numerous cases have not been considered end-to-end. Further, the starting point should but often doesn’t consider the strategic investment needs at the member option (whole of fund) level.

So what’s the right recipe for your Investment team??

Finding the right ‘recipe’ - or combination of these factors - requires a lot of learning, trying and refining. Just ask my thirteen-year-old daughter who loves to bake. I’ve observed her work out when a recipe matches her skill, the utensils available and the outcome she’s aiming for. I’ve also heard a lot of smoke alarms when things don’t exactly pan out the way she’d hoped.

Improving outcomes for the end customer is core to why 1886 exists. We ask our clients if they, applying their fund’s “thumbprint”, have strategically connected capital, people, process and information? Are they satisfied with the pace of delivering to objectives? Was the starting point for making decisions on systems and data about implementing “new tech” or about making investment decisions at the member option level? Do incumbent advisers have recent, hands-on executive experience answering these questions?

In practice, funds have portfolios to manage each day, members to respond to, regulators to report to - and we see many asking:

• Do I have all the skills and experience to answer these questions??
• Have I got the right mix of ingredients and method (implementation) for both today and in 5 years’ time??

We hope this short article enables you to self-reflect. As you do, here are some additional questions to guide your thinking:

• Have we established investment data and analytics capabilities that support trade-off decisions between short-term performance goals and long-term objectives?
• How do we organise our people to satisfy both the regulator (e.g. APRA SPS530) and differentiated sustainable delivery of investment and member outcomes?
• How do we integrate ESG data into our day-to-day investment process?
• What role should the Investment team play vs. Operational and Technology teams vs. the role of solutions and service providers??
• If strong sustainable whole-of-fund or member-option-level investment returns are the goal, how is our data and technology ecosystem designed, architected and integrated??
• Have we efficiently integrated data from the back office to the investment team or analytics team with the board and member reporting??
• If a major part of the competitive battle is member connection and engagement (or disengagement), how can investment insights be leveraged quickly, easily and in a way that resonates with members who are less investment and financially literate?

Don’t crack a tooth on the wrong recipe?

At 1886 we have a proven track record of helping clients answer these questions and then delivering accelerated positive change - we “bake excellent customised cookies” for a living.?

We are at our best when partnering with investments and superannuation clients who have an aspiration to continually improve and see value in leveraging external expertise to help design and implement their investment systems, processes, people and governance.?

Tap into our knowledge of wealth today.