
March 7, 2019
Stanford’s Dr. Ashby Monk on the $100 Trillion That Needs Reshaping – Problems Sighted
Check out the Problems Sighted Episode Page & Show Notes
Key Takeaways
- Institutional investors collectively manage ~$100 trillion
- They control the assets of pension funds, insurance companies etc.
- Institutional investors can be thought of as the “long-term investing community”
- They can invest in things others can’t because they can hold those investments for much longer (e.g. decades)
- They’re uniquely positioned to think about long-term issues like climate change, education, wealth inequality, etc.
- Despite representing so much capital, they’re not allowed the resources to be really good at their jobs
- If you want to have massive impact, remember – “finance touches everything”
Intro
- Dr. Ashby Monk (@SovereignFund) is the Executive Director and Research Director of Stanford University’s Global Projects Center
- He’s also the co-founder and Chairman of Long Game, which leverages short-term incentives to help people achieve their financial goals.
Institutional Investors
- Who/what are these institutional investors?
- “Institutional investors” as a term gets used to describe many different entities
- In Dr. Monk’s domain, they’re “asset owner investors”
- They control the assets of organizations like:
- Pensions
- Insurance companies
- Sovereign wealth funds
- Endowments and foundations
- Collectively, these organizations represent about $100 trillion
- Long-Term Investing
- Institutional investors can be thought of as the “long-term investing community”
- They can invest in things others can’t because they can hold those investments for much longer (e.g. decades)
- The Linchpins of Our Capitalist System
- Asset-owner institutional investors are critically important to the survival of the welfare state and the functioning of capitalism
- “Private equity funds get their money from pension funds”
- “Hedge funds get their money from family offices”
- “Venture capital funds get their money from endowments”
- Asset-owner institutional investors are critically important to the survival of the welfare state and the functioning of capitalism
Long-Term Existential Risks
- Because of the long time horizons of their investments, institutional investors have an opportunity to focus resources on long-term risks like climate change, education, wealth inequality, etc.
- “If you really want to take those big existential issues and make them real today, the first organizations you should be looking to are those with a long time horizon”
The Firewall Problem
- There’s a massive firewall between the capital these institutions invest in the markets, and the capital they can invest in themselves
- They are really limited in their ability to invest in systems, people, or technology
- Those 3 things help asset managers elsewhere to generate returns
- “The pension funds of the world don’t have access to the same toolkit that the asset managers have”
- Those 3 things help asset managers elsewhere to generate returns
- They are really limited in their ability to invest in systems, people, or technology
- That forces them to outsource a lot of the investment decisions to private agents and intermediaries like hedge funds or other asset managers
- These have different incentives and time horizons, creating structural risk
Underfunded Pension Plans
- Many pension plans, for example, are “underfunded”
- This means that even if their investments hit the returns they’re hoping for, they still won’t be able to cover all the promises they made
- 3 ways to bridge those gaps:
- Increase contributions
- Cut benefits
- Increase investment returns
- Most choose the more “politically palatable” third option, which pushes them to chase higher and higher returns in order to fill funding gaps
- Again, this forces those people to outsource their investments to hedge funds and private equity firms
- Often, they don’t understand exactly how much of their returns are being absorbed by these intermediaries
What problems does Dr. Monk think people should work on?
- Better technologies for asset-owner investors
- 3 key areas these institutions can improve upon: governance, culture, and technology
- Of the 3, technology is the easiest to improve and they’re finally coming to terms with that
- Dr. Monk has seen institutions become more willing to work with startups as they try to improve their internal investing abilities
- His hope is that by adopting new technology, they’ll accelerate innovation in the other two areas: governance and culture
These notes were edited by RoRoPa Editing Services