Keith Ambachtsheer

The late-1960s were auspicious times to trade the pursuit of a PhD degree in economics for a career in the institutional investing business. Terms such as Modern Portfolio Theory (MPT) and the Efficient Markets Hypothesis (EMH) had just entered the investment lexicon. My first job in the business was two-fold: 1) understand how a ‘real world’ institutional investment shop operates, and 2) see if the ideas behind concepts such as MPT and the EMH have any practical relevance in the real world of institutional investing. By the mid-1970s, I had accomplished both tasks (at least to my own satisfaction) and was ready for the next challenge.

That next challenge arrived through a little book by management philosopher Peter Drucker, which he would describe twenty years later as his least-read and most prescient. The Unseen Revolution (1976) provided the broader context in which to assess the relevance not only of the ideas behind MPT and the EMH, but also of institutional investing as it was practiced at that time. The central question Drucker posed was how, and in whose interest, the coming wave of retirement savings would be managed. He observed that ordinary workers were on their way to becoming owners of the means of production not through a Marxian revolution, but through pension plan membership. He worried, however, that this vast pool of financial capital would end up being managed not in workers’ interests, but in the interests of politicians, corporate executives, labor leaders, and the financial services industry.

Back in 1976, Drucker’s central question and his related agency concerns struck me as profoundly important to the future of not only institutional investing, but also to the future of capitalism itself. And that continues to be my view today, as I research, write, and speak on ‘Tomorrow’s Pension Fund’, with its five critical success drivers: 1) aligned interests, 2) good governance, 3) right-scaled, 4) competitive compensation, and 5) sensible investment beliefs. Stating the obvious about the fifth success driver, managing a pension fund without sensible investment beliefs is likely to be as successful as circumventing the globe without a compass (or a GPS).

Given that this entire book is about sensible investment beliefs, this foreword is no place to address the topic in any detail. I would be amiss, however, not to acknowledge another intellectual giant who has greatly influenced my own thinking on the topic. John Maynard Keynes’ 1936 opus The General Theory of Employment, Interest, and Money was mainly about the respective roles of fiscal and monetary policies in stabilizing capitalist economies at high rates of employment Yet in my view, Chapter 12, titled “The State of Long Term Expectations”, still stands as one of the greatest essays ever written on the topic of investment beliefs in an institutional investment context.

Keynes observed that institutional investing often seems to resemble a beauty contest. However, the goal of the contest is not to pick the most beautiful stock by some objective standard, but to pick the stock average opinion will deem the most beautiful “three months or one year hence”. In Keynes’ view, such a mindset fosters short-termism and mind games at the expense of thoughtfully converting precious savings into long term, wealth-creating investments. I encountered the same mindset when I began to study institutional investment practices as an insider some forty years ago. Unfortunately, this same mindset continues to hold sway in far too many cases today.

Why has change been so difficult? It is hard to better Keynes’ 1936 explanation even today. In his words: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally”. In other words, if everybody else is playing the beauty contest game, you’d better play it too. It is far safer to be wrong in a crowd than to be wrong and alone. So how do we move institutional investing from this zero-sum to a positive-sum game? That is where the other four Tomorrow’s Pension Fund success drivers come in. The world needs more arms-length, large-scale pension funds with great governance and operations capabilities. These are the funds capable of not only articulating sensible investment beliefs, but also capable of using them to create value for their stakeholders.

So we commend Kees Koedijk and Alfred Slager for taking on the challenge to write this book on sensible investment beliefs. It has much to offer those ready to receive its messages. Peter Drucker and John Maynard Keynes would be pleased.

(Keith Ambachtsheer is a strategic advisor to major pension plans around the world and director of the Rotman International Centre for Pension Management, University of Toronto)

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