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Systemic reform is the only course for ‘decimated’ investors
Debating relative performance in this crisis is like re-arranging the deck chairs on the Titanic.
At a recent conference in New York, I was asked to speak about the Needmor Fund’s 20 years of experience as a mission investor. I wrote a paper comparing Needmor’s returns to the returns of a traditional foundation, which was founded by the same family, uses the same investment consultant and has a very similar investment strategy. In the end, I decided not to read my prepared paper. The reason had nothing to do with my conclusions: Needmor in fact outperformed the traditional fund by 4.5% last year, but by only 0.4% over the last five years. My careful analysis revealed the majority of this short-term out-performance was caused by the quality bent of Needmor’s screened equity managers, which basically supports the conclusion that ESG screens are a proxy for good management. This quality bent functions like a hedge, so that one consistent result of Needmor’s mission investing has been to reduce portfolio volatility. No, the reason I decided not to read my paper was that I was embarrassed by its irrelevance. At the conference, I listened to my peers make the case that social (or sustainable or ESG) investing is competitive with the dominant markets and it made me wonder.
Why are we trying to prove that we are as good as the dominant markets? The dominant markets have failed dismally. Needmor did 4.5% better. So what? We still lost 25% of our endowment. We failed in our fiduciary duty and disappointed our grantees and our staff because we had faith in the dominant markets. A generation lost their retirement security, millions lost their jobs and their homes, and the next generation is foregoing or deferring higher education. And we did 4.5% better. Yippee. The word decimated is a Latin military term used to describe an army that has lost 10% of its soldiers. We were all decimated. Why are we talking about a fraction of a point of performance difference within a failed paradigm? That’s rearranging the deck chairs on the Titanic. We need to be talking about systemic reform. Let’s look at the paradigm that failed. It can be summarised as: “Unregulated markets are the most efficient allocators of capital and pricers of risk and they will result in the greatest and most sustainable global economic growth.” This was not just a financial paradigm. It underpinned the dominant theories of global development and political progress.
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