What does a CIO do?
There are different ways to interpret the role of chief investment officer (CIO), but I believe the most important aspect is fostering cognitive diversity to build teams focused on the future world.
There are two broad approaches to being a CIO. One is to make all the major calls across a range of portfolios. The other is to build investment teams equipped and empowered to make those decisions themselves.
Although I started my career as a portfolio manager, thriving on the personal responsibility for positions, it’s clear to me that a CIO can best serve clients’ interests by creating the culture and processes to help teams manage their assets.
This is not necessarily the intuitive conclusion. There is plenty of evidence to suggest that the optimal investment style is high conviction and concentrated – which is probably easier to achieve from a single voice giving instructions than from an open discussion.
Yet even if that was once the case in the past – and I am not sure it always was if you account for survivorship bias – I am certain it is not true today or will be in the future.
The present investment landscape is dominated by rapidly accelerating themes, from digitisation to the climate transition and fiscal dominance. I doubt many individuals can keep pace with all of these changes on their own, let alone their complex interactions and their second- and third-order implications for asset prices. It takes collaboration, creativity, and constructive challenge to map their likely effects on markets.
The proof is in the performance
I see this increasingly supported by the growing academic literature too. A study released earlier this year put it in stark performance terms. “We show that fund management teams with heterogeneous educational backgrounds, work experiences, nationalities, genders, and races, outperform homogeneous teams by 3.24% to 7.96% per annum after adjusting for risk,” its authors summarised. “Diverse teams outpace homogeneous teams by exploiting a greater variety of long-horizon investment opportunities, avoiding behavioural biases, and eschewing downside risks. Diversity allows funds to circumvent capacity constraints and deliver more persistent performance.”
A similar recent analysis looked at the results of collaboration between equity and bond teams, two often different perspectives. Its authors noted that “combining the information of shareholders and creditors complements the whole firm-level information”. This makes sense to me. Simplistically and traditionally, equity investors look for long-term growth, while bond investors focus on nearer-term threats to credits and cashflows. Put them together and you can assess not just the whole capital structure, but the whole spectrum of risks and opportunities.
This reaffirms, rather than changes, my own thinking about how to build an investment team. I have always sought to promote cognitive diversity in all its forms, but the seismic shifts confronting investors today make this more important than ever.
This is not just diversity for diversity’s sake – like other ESG factors, I believe it is financially material, as indicated by the independent academic research. It’s worth highlighting too that these studies are based on past performance, so I would expect the trends they describe to intensify as diversity becomes more essential in helping teams understand what is happening in markets.
Humble, nimble, and ready for the future world
Bringing together not just different backgrounds but also different expertise helps us to identify opportunities and risks, and prepare for the future world, by fostering more views and perspectives.
This is why I am so excited that we have established our new Active Strategies team, unifying and reinforcing our capabilities in equities and fixed income, working as one with all our other investment teams to focus on delivering investment excellence for our clients. You can read more about this here, but to quote my colleague Colin:
“We believe putting a trinity of equity, debt and investment stewardship skill sets together in our Active Engagement Model will yield a quality of analysis, specifically purposed for what we think lies ahead, providing a three-dimensional lens to analyse and capture both fundamentals and not-yet-financial risks.”
I am also proud that at LGIM our Global Diversity & Inclusion Leadership Council is chaired by our CEO and that we have championed initiatives like #10000Blackinterns and the Diversity Project’s Cross-Company Returner Programme. All these activities add to the richness of our culture and ultimately enhance decision making.
I mentioned in this month’s CIO call that we need to stay humble and nimble as investors. Diversity helps us do just that. The I in CIO doesn’t stand for inclusion, but I absolutely do.