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”

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”
• 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