As you can read from my recent stream of articles on ESG, the want for people in finance (and more than 42% of institutional investors) to do the right thing and take care of our environment appears a welcome sea-change in a finance world driven to outperform generally well-known for deploying brutal vile-maxims.
Men or mice
The inspiring story of KKR’s industrial group‘s buyout of a garage-door manufacturer, from all appearances, is in stark contrast with Carlyle’s savage indoctrination of mobile home owners, with Warren Buffet buying up the land behind their backs as described on John Oliver’s Last Week Tonight. How finance rules the roost of humanity is not what any observer would describe as producing human excellence at its finest.
I have my suspicions but reserve my final judgment of why the founders and CEOs of KKR, Carlyle, JPMorgan, Oaktree, Bridgewater, Wells Fargo have all (been) moved to the sideline over the last few years, now letting new managers pick up the baton of financial engineering. The sheer amount of management changeover must not go unnoticed by anyone paying attention to the business of finance.
With much fanfare, the finance industry, producing eleven times the size of production as a contribution to GDP, now attempts to develop a much-needed new persona. For the public, as the ultimate triumvirate investor is steadily losing trust in finance, the recent congressional hearings reveal how the public is getting duped left and right.
So, when I first read BlackRock’s yearly letter to shareholders and heard CEO Larry Fink in interviews connect the legacy of his dad with the business moving forward, I was impressed. Only to be promptly corrected by an experienced asset manager who told me why financial firms like BlackRock had to change: the institutional investors managing public money told them to.
So, all appears well now.
Institutional investors parade around a new thesis of investment allocation in recognition of Environment, Social, and Governance (ESG) factors, managed by self-aggrandizing collusion surrounding the MSCI index, or alternative and in-house variants referred to as Impact Investing or Responsible Investing. Those new descriptors inferring the vile maxims I described above were indeed the modus operandi of the past.
Apart from the notion that you cannot consistently outperform an index, as Charlie Munger of Berkshire Hathaway pointed out, the precept of sustainability upon which all the above new investments hinge is incompatible with evolution. For, as cosmologists and evolutionary biologists declare, nothing in our universe is sustainable. A thesis of sustainability cannot accurately trace assets that are, at best, merely renewable; the capital requirements and growth trajectory of renewal are pretty different from the make-believe of sustainability.
Hence, despite shiny appearances, all is not quite well with the new normal of asset management.
Room At The Top
What gives is what I hear asset managers murmur when they appear to have done their best in elevating the investment allocation strategy away from the ransacking of human ingenuity in the past.
The solution to improving consistent and repeatable returns in asset management is to align the long of the investment thesis with the long of the investible assets. This means that the nature of the investible asset dictates the thesis of asset allocation, not vice versa, as is prevalent today. Put differently, the asset determines distribution, not the distribution determining what asset can be discovered. I describe the broader scope of change in risk profiling in more detail in reinventing asset management.
We must begin to realize we, humans, can do nothing to prolong our existence on our planet or extraterrestrials than to pay close attention to nature, with scientists pushing the boundaries of what can be discovered and humans obeying our best interpretation of nature’s rule. And since nature dictates all assets (people and resources) in our universe evolve around renewal, not sustainability, our financial thesis must operate to guide those assets into renewal and then some.
Asset managers play a crucial role in the development of humanity, for the financial arbitrage financiers deploy ultimately determines what humanity can discover. Saliently, asset managers play a much more critical role than the government, as asset managers are not beholden to a ball-and-chain of the democratic process, falling apart at the seams, to make substantive change in society.
Therefore, the integrity of a more modern investment allocation thesis is paramount. The pursuit of investment strategies ignorant of evolutionary principles creates a false-positive from which humans may be unable to recover. The laissez-faire arbitrage of the past 40 years, uncorrelated to evolutionary excellence, has been responsible for the deflating stature of American credibility. In the end, not money but the renewable excellence of people make our world go round.
To ensure asset managers do not need to become evolutionary biologists, we have spent the last ten years developing new principles of finance to improve human ingenuity and adaptability, tapping into a broader standard deviation of merit than the old systems of finance could even dream of, inducing less embedded risk because the thesis is now compatible with the nature of the assets.
Now is the time for financiers to show real leadership that improves humanity. The kind of leadership that rejects new and misleading manmade manacles and instead subjugates finance – for the first time – to humanity’s best normalization of evolutionary truth.