Monday, March 25, 2013

Sometimes, to Optimize You Have to Compromise

In the asset pricing paradigm of modern portfolio theory, the goal is always to be maximizing. Companies are expected to "maximize shareholder value". Investors are expected to "maximize risk-adjusted returns".

To be successful at maximizing, you have to focus on one, single point of value. You can't maximize multiple things.

If you have multiple purposes you are trying to achieve, its better to be optimizing a balanced portfolio of achievements. Optimizing means sometimes accepting less than the maximum on one point of value, in order to realize a better overall experience across multiple points of value.

This is the case with the pursuit of sustainable prosperity, where "sustainable" means able to continue, and "prosperity" means having enough, and to spare.  Sustainable prosperity means being able to continue having enough and to spare. In order to maximize sustainability you have to establish and maintain the optimal balance of multiple competing objectives, and the right balance changes all the time. You have to adapt.

So, for sustainable prosperity in enterprise, we need to optimize the balance between multiple competing interests of suppliers, customers, workers, owners, investors, the community, etc.

For sustainable prosperity in stewardship investing, we need to optimize the ability protect principal for successive generations in order to continue paying benefits to successive generations, while managing costs to match benefits.

It's not about maximizing one thing. It's about optimizing the balance across many things.

Sometimes, that means a compromise.

Saturday, March 16, 2013

An Hippocratic Oath for Stewardship Investors

First, do no harm.

That is an oath physicians take on caring for the biophysical integrity of the human body.

Stewardship investors should take a similar oath when caring for the financial integrity of their entrusted funds. Good stewardship investing achieves its financial goals without oppressing workers, despoiling the environment, defrauding other investors (stewardship or otherwise) or fomenting international discord.  

There is an important conversation to be had about how much more of a positive impact stewardship investors can be expected to have on societal values, but at a minimum they should be both empowered and expected to do no harm to society, to the environment and to the economy more generally in pursuit of their required financial returns.

This they can do by re-taking control of the decision to reinvest, so that they can always be directing their investments directly into real new value creation, where new value is being created, as value creation within the economy changes over time, and from time to time.  

That's the new stewardship portfolio design paradigm: a portfolio that evolves as the economy evolves.

Wednesday, March 13, 2013

Harvard Endowment Needs Cash

Yesterday I learned an interesting fact. Some 70% of the operating budget for Harvard is funded from its various endowments.

This puts a lot of pressure on those endowments to constantly be generating a consistent stream of earnings through its investments. How well does the current portfolio design paradigm of opportunistically buying and selling stocks, bonds, alternatives to stocks and bonds and other instruments derived from stocks, bonds and alternatives, fit this need for constant income?

Experience has the answer. Not so well.

Harvard is not unique in this. The current portfolio design paradigm will not serve.

They need a new one.