Last week I was at a CalPERS’ offsite for a panel on the importance and purpose of investment beliefs for long-term investors. It’s a topic I quite enjoy (and tend to have some fun with), as I think a coherent set of investment beliefs is a key component of the long-term investor’s toolkit. So I give all credit to the California public pension fund for putting the session on, and animating it with some very intelligent folks (...and then putting me on stage with them...).
In particular, I have a newfound appreciation for the difficulty facing pension funds in developing a set of investment beliefs. Why is this a challenge? Because it means the organization has to come to an agreement on how financial markets actually generate financial returns. This may appear straightforward, but it isn’t.
Here’s my friend Gordon Clark reflecting on some research he’s doing on investment beliefs: “We don’t seem to have a shared set of beliefs that underpin how markets function or should function.”
And here’s Oxford’s Dane Rook talking about the same research: “Most organizations won’t have one unified theory of finance in the way that they view markets...It’s a set of multiple, but comprehensive, beliefs typically.”
Let me sum up how I interpret these two statements:
- Investment beliefs attempt to fill the large gaps in our understanding of financial markets left by conventional finance theories.
- Investment beliefs offer investment decision-making touchstones for investors that have lost faith in modern finance theories.
- Investment beliefs provide these skeptics with a level of rigor that one might normally associate with a theoretical framework...but without the theoretical framework.
These descriptions of investment beliefs help to explain why they have become so popular. (According to a survey run by the good people at P&I and my friends at Oxford, “About 57% of the 685 asset owners, money managers and investment consultants surveyed by P&I and Oxford said their organizations officially held and used investment beliefs.”) Investment beliefs are an attempt to supplement the conventional wisdom (that has led to incessant financial crisis) with unconventional approaches (that better match organizational mandates).
Truth be told, many of the investment beliefs held by organizations are in fact derivatives of traditional financial theory. But (!) just as many beliefs take these traditional ‘truths’ and extend them into new areas (such as ESG).
Let me break it down like a real academic (nerd): investment beliefs offer those investors looking beyond “theoretical dogmatism” a tool for “skeptical inquiry”. And when they give up their dogmatic beliefs in “absolute truth” as a guiding force, they require a new touchstone to guide investment decision-making. This is the role of investment beliefs.
