Appendix 1: Full List of The Jobs to Be Done in Asset Management

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Technical Jobs to be Done

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A Money Manager must do all of the functional Jobs below at an acceptable level just to be in business. The bare minimum Functional Jobs investors required from Money Managers is to optimize the risk adjusted return or the Sharpe ratio of the investment. Thus investing is a constant trade off between “make more money” and “do not lose money.”
Don’t lose money. As Daniel Kahneman documents in Thinking Fast and Slow, people hate to lose money more than they care about making money. Even aside from the emotion, some institutional investors and many individuals (e.g., those close to retirement) have a structural imperative to hate losses more than they value gains. Sophisticated Money Holders understand that sometimes they are going to lose money. However, they expect Money Managers to have clear reasons and to perform within the expectations of their investment strategy, as well as to make money overall over time. Smart Money Managers address this need by focusing on risk adjusted return offerings, and articulating the tradeoff between risk and returns. For example, Bridgewater’s Pure Alpha strategies allows investors to select different volatility levels based on their risk preference. Goldman Sachs Asset Management and Pacific Investment Management Company, LLC offer similar strategies. Exceed Investments offers a set of index funds whose market differentiation is a structure to minimize the odds of a loss beyond a defined limit.
An example of a vulnerable category of funds which does not do this Job well: Highly leveraged, high volatility, high concentration hedge funds, which cannot withstand withdrawals during significant down years. The average lifespan of a hedge fund is 5 years; within a three-year period about one-third of hedge funds disappear.
Make more money. Some investors look to optimize for highest returns above all over time. These are typically ultra high net worth individuals or sovereign wealth funds that can tolerate volatility for long periods of time. Such investors might invest in the most nascent of asset classes, e.g., names, income, finance, currencies, timber, farms/ranches, art, collectibles, or carbon credits. Fund managers that optimize for high returns over other Jobs include activist investors such Bill Ackman at Pershing Square and Bruce Berkowitz at Fairholme Funds. At a Boys & Girls Harbor Investment Conference, Bill Ackman and Ray Dalio debated the merits of each other’s strategies; Dalio warned that Ackman’s investment strategy poses “risk of ruin”. Warren Buffett’s value-focused Berkshire Hathaway also optimizes for returns, and may accept as a result short term underperformance. Particularly in their earlier years, all of these investors offered relatively poor diversification. Ackman, Berkowitz, and Buffett would all argue that there exist great stock pickers who can beat the market, but such investors only have a few good ideas per year, so therefore they should make only a few trades per year. Similarly, angel investing is the highest-returning asset class we’re aware of, with median returns of 18% to 54% across 12 academic studies, but offers very poor liquidity, transparency, and predictability. Thus to get highest returns, Money Holders have to tolerate likely short term volatility, lack of liquidity, and/or lack of diversification. Charge minimum fees and expenses. Recent Money Manager underperformance, the low growth economic environment, and underfunded pension funds all force Money Holders to pay more attention to fees. Vanguard is the role model and king of the low expense Money Manager industry, both because of their focus on indices which require minimal research, and their highly unusual status as a Money Manager which is owned by its own funds. ETFs (BlackRock iShares) are another way to dramatically lower expenses. Discount brokers like Charles Schwab and TD Ameritrade were disruptive in their day to full service brokers; many believe robo-advisors are the modern equivalent. There is room for new businesses that shed light on the true costs and expenses of fund management. While hedge fund and private equity funds typically report management fees and performance fees, there is little transparency around other fees charged to funds such as legal, compliance, entertainment, custodian, and even middle office, which can add up to up 100 basis points. Companies such as AcordIQ, Addepar, Novus, and Vitrio help aggregate and expose the costs embedded in a fund as part of holistic portfolio governance.

Functional Jobs to be Done

\label{functional-jobs-to-be-done} Certain Money Holders have unique needs which create windows for new business models to emerge. Protect my job security. “ No one ever got fired for buying IBM.” Institutional investors tend to cluster-invest in the same large funds, even though many studies show that small funds consistently outperform large funds. This could be because allocators all want access to the best funds. On the other hand, it could be argued that there is less career risk if allocators follow the crowd and invest in the same funds their peers select; career risk is one of the biggest enemies of alpha. Inflation protection. Today we live in a low inflation environment and some economists argue that we are entering a deflationary period. However, that was not always the case, and unlikely to be always the case. Inflation-linked (IL) bonds, real estate, and commodities provide an inflation hedge. In some markets used to high inflation such as China and India, Money Holders choose to put a significant portion of their wealth into gold. Notably, the demand for gold in India and China is also driven by cultural preferences as well; see Experiential Needs below. Provide diversification. The ultimate diversification is to own an index of the entire market, but of course then tautologically you will only get market returns. The traditional diversified portfolio is the 60%/40% equities bond mix. Alternatively the risk parity model is a typically passively managed portfolio that performs well in most (but not all) economic environments - growth, inflation and deflation. A number of funds offer such an option: The institutional market is dominated by Bridgewater’s All Weather (~$90bln), AQR Risk Parity fund (~$25bln) and Invesco Balanced Risk Allocation (~$20bln); Greenline Partners’ Tax Efficient Risk Balanced approach is an emerging manager in the family office space. However, investors need to think about diversification holistically beyond just investing in public markets, i.e., how to incorporate venture capital and real estate or even art in their portfolio. We see few solutions in the market-place that allow for true diversification across both public and private markets. Minimize taxes. Life insurance is a tax-protected way to protect your heirs’ interests. Puerto Rico marketed its bonds as “triple tax free” (exempt from federal, state and local income taxes), which made them very attractive, until Puerto Rico admitted they could not actually pay them off. Greenline Partners offers a risk parity model, not common among Money Managers serving institutions, which focuses on tax minimization by understanding the long term impact of deferring taxes and overlaid with a unique tax loss harvesting methodology. Some robo-advisors provide automatic tax loss harvesting to help investors minimize taxes as well. Provide access to specific sectors. Traditional investment consultants offer very granular tools to diversify along your axis of choice. Some Money Managers offer highly targeted funds for Money Holders who want carefully defined target sector exposure. For example, Motif Investing enables individuals to invest in a given theme (a “motif”), e.g., all stocks that benefit from a theme of the ‘connected car’. Investors can effectively custom-design their own fund according to any theme that they believe in. Investors may also look for target exposure to markets that they cannot easily trade, such as frontier markets which may not be open to regular investors. So Himalaya Capital offers access to Chinese Equities, and Shehzad Janab’s Daman Investments hedge fund provides access to the UAE market. These targeted opportunities can at times hugely outperform developed markets. However, investors should be prepared to accept both local economic as well as political risk as well as lack of diversification. Match returns to liabilities and obligations. Often Money Holders do not care about the highest return per se, but want assurance that they can meet their financial obligations. This is particularly true for retirees as well as many institutional investors such as pension funds and endowments. If you invest in dividend funds, utilities, bonds, or many types of rental real estate, you know with (relatively high) confidence that you will get predictable incoming cash payments. For example, two of the biggest municipal bond funds which provide predictable, tax-free income are T. Rowe Price Tax Free High Yield Fund and American High Income Municipal Bond Fund. Bond funds, however, in a low interest environment provide low returns and often do not match investor liabilities. Alternatively, commercial and multi-family real estate funds, which provide a blend of annual dividend-like payment and opportunity for appreciation at exit, have also become a popular investment for liability matching. Achieve political goals. Many public Money Holders have defined public service goals, e.g., invest in companies in their home state. Similarly, most sovereign funds look for way to invest in economic development in their local economy. We see a few Money Managers that specifically target the unique needs of sovereign funds creating customized investment strategies. Self-discipline. Just as with losing weight, there is no shortcut to success in investing. Money Holders need to start by putting money aside, which requires discipline. There are business models that encourage such discipline, including certain retirement pools, e.g., 401Ks, which charge penalties for early withdrawal. This has two benefits: it allows the Money Manager responsible for the 401Ks to make long-term investments, and it also increases the likelihood that the retail investor will have more money for retirement. Many advisors automatically withdraw each month an investment allowance from their customers’ bank account. Major catastrophe protection. A non-trivial percentage of investors want to protect themselves in the event of major economic dislocation. They might invest in a backup luxury second home, ideally in a place like Vancouver; Canada is a stable country with rule of law and low vulnerability to climate change. Portable wealth (gold, jewelry, diamonds) allows you to cross borders easily in the event of social turmoil. Certain local businesses (e.g., a restaurant or farm) can provide income even in the midst of turmoil. Mormons keep a twelve-month supply of food and essentials in their basement as insurance. We are not aware of a financial product offering that addresses this unique need more systematically. Catastrophe insurance (e.g., flood insurance) provides protection against narrowly defined protections. However, in the event of The End of the World As We Know It (the disaster prepper’s worst-case scenario), traditional financial services providers will probably not be reliable.

Emotional Jobs to Be Done

\label{emotional-jobs-to-be-done} While performing the functional Jobs is the bare minimum requirement for a Money Manager, and special purpose Jobs target specific customers, Jobs at the emotional, experiential and social level create a deep connection with clients and lead to “sticky” relationships. The ability to do these Jobs well marks those firms which are likely to stay in business for the long-term. According to Amanda Tepper, CEO of Chestnut Advisory Group: “contrary to conventional wisdom, investment performance alone does not drive asset flows. While there is a clear relationship between the two, investment performance accounts for only about 15% of the reason for placing money with managers. We found correlations between trailing three-year returns (the primary metric most institutional investors follow) and subsequent one-year net capital inflows ranging from only 0.24 among small and mid-cap equity managers to just 0.04 for Global Fixed Income managers. ” We have found that customers may not clearly express or even openly admit that they value Emotional, Experiential and Social Jobs in some cases higher or as high as the functional Jobs. However, the Money Managers that perform these experience and social Jobs well consistently attract more assets. Customer service. Customer service is important for both retail and institutional investors. In the retail space, in addition to expertise, investors value empathy in their financial advisors: “An empathetic financial advisor is one who truly listens to clients, ensuring they feel understood and who demonstrate that they care.” One expert in private wealth management says that advising people about money is being “part financial expert, part shrink, part friend and confidant, and part entertainer.” In the institutional space, hedge fund Bridgewater has a bend-over-backwards-for-clients internal culture; a large client service department staffed with investment level professionals; and its own analytics team whose research and advice is provided to clients at no extra charge. Additionally, ability and availability to provide insight into “how the world works” from an investment perspective earns Bridgewater loyal long-term investors. The high importance Money Holders place on customer service calls into question the viability of technology-only investment platforms (like robo-advisors) and the black box hedge fund model of “give me your money and wait for your annual report.” Transparency. ARK Invest offers several ETFs with near-real-time exposure of their individual trades. Goldman Sachs recently announced that it will share some of its secret sauce with its clients. One of the current problems that institutional investors face is lack of adequate transparency and control of all costs charged by manager, which was dramatized by the Madoff fraud. According to the New York Times, “Earlier this year, a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.” The investment agreements that institutional investors sign often give a lot of leeway to managers to pass questionable costs to the LPs. Recently, the Carlyle group passed on their limited partners (LPs) the cost of a opportunity for companies such as Vitrio, Novus, and AcordIQ which provide a technology platform to institutional investors for systematic oversight of fund managers. Some industry champions, such as Scott Evens, CIO of one of the largest public pension fund, New York City Retirement Systems, are leading the way to establishing best practices around a revamped due-diligence and governance process. Education. The fastest growing sector in investment research for the last two decades are expert networks, e.g., GLG. They slice out what many analysts traditionally considered their investment edge – a proprietary group of expert relationships built up over years in the business - and offers direct access to experts on any possible category, for on-the-fly education. There is no ongoing education requirement for many professional allocators, and most HNW private investors and retail investors have little to no education in contemporary investing, observes Joseph Reilly, a family office consultant in Greenwich, Connecticut. This aspect of asset management often gets lip service, but it is essential to retaining clients. The smaller investor, and even large family offices, cannot possibly keep current with the changes in the way the markets are traded. They have very little understanding of the arms race around esoteric asset packaging that runs rampant on the Street, or how high frequency trading actually affects the market. It falls to Money Managers to educate their clients on how new strategies work, despite their clear conflict of interest. This goes for professional allocators as well, many of whom think portfolio management started with Markowitz and ends with Swensen. Recognizing good change from simply more risk is the Job of education. One of the secrets of Bridgewater’s growth to be the world’s largest hedge funds is their enormous investment in what is effectively free consulting for their clients. Social welfare. Millennials and women – both growing forces in the pool of Money Holders – are more likely than their past generations and men in general to value doing good in addition to doing well. According to Patrice Viot Coster, COO of AXA Investment Managers Research: “People may want to express openly who they are through their investments: I am what I invest.” We do not mean the philanthropic activities of hedge fund billionaires, but the general desire of the average investor to positively impact the world through their investments. Social impact or “green” bonds offer a creative way for investors to invest in companies offering returns linked to achieving certain defined social impacts. Numerous “double-bottom-line” socially responsible investors promise Money Holders the option of earning high returns while they achieve certain socially desirable goals. Generation Investment Management (co-founded by former Vice President Al Gore) has over $7B under management, and differentiates from competition in large part based on their focus on “sustainability research”. According to Cambridge Associates, private impact investment funds – specifically private equity and venture capital funds – that pursue social impact objectives have recorded financial returns in line with a comparative universe of funds that only pursue financial returns. Religious beliefs. Religious institutions (e.g., the Catholic Church and Mormon Church), observant individuals, and some family offices look for investments that are compliant with their religious views. For example, consider Omar Bassal, head of asset management for MASIC, a shariah-compliant family office based in Saudi Arabia. He structures investments in public equity, private equity and real estate to comply with Islamic restrictions regarding business activities and interest, among other things. Omar sees “a shortage of investment funds that are specifically designed for investors that want to invest in a way that is consistent with Sharia laws.” Shariah-Compliant funds are prohibited from investing in companies which derive income from the sales of alcohol, pork products, pornography, gambling, military equipment or weapons. Additionally, Shariah compliant funds cannot employ conventional leverage or sell shares short. Instead of investing in bonds, notes, T-bills and other conventional fixed income products, Shariah compliant investors favor trade finance funds, leasing funds and Sukuks (income-generating asset backed pools) which provide a substitute for the portion of investors’ portfolios that carries less risk than equity markets and provides yield. Access to networks, e.g., celebrity investors. Some investors buy Berkshire Hathaway stock just to get an invitation to their annual meeting. In public markets, value investors puzzle at the valuations Elon Musk’s companies, Tesla and SolarCity, command and attribute that partially to Musk’s star appeal. Some VCs choose to invest in a company in part to build a stronger relationship with existing prominent VC investors. Also, in venture capital, companies that have raised money from celebrities often attract people eager to put money in just to have a shot at rubbing shoulders with the glitterati. STAR Angel Network formalizes this by offering membership exclusively to athletes and celebrities. Star athlete Torii Hunter and Wall Street Veteran Ed Butowsky formed the exclusive Clubhouse Investment Club for the same reason: the founders hope that Hollywood and sports celebrity members’ access to social media will contribute to stronger performance of their investments. Personal use and passion. Some investors put money into art, wine, jewelry, antiques, stamps, or even a sports team, more for personal use than as a financial investment. Baby boomers in the west, who have paid their mortgage and put their children through college, as well as the nouveau riche in Russia and China, are driving the value of “passion investments” up. Many investors put money into equity crowdfunding sites (AngelList, CircleUp, FundersClub, OurCrowd, SeedInvest, etc.) and product crowdfunding sites (Indiegogo) because of the excitement and ego gratification of investing in a small, unknown, exciting startup company. The same is true for individual angel investments made by retired business people who enjoy continued engagement and the energy of small start ups. The hope of a financial payout is not the only motivator for these angels who also invest their personal time and experience. One such angel shared that he invests in all the startups his buddies put money into, because he does not want to be the only one left out at the local bar who is not toasting to the one startup they invested in with a 20X return. Coolness and exclusivity. The best example of this is Bernie Madoff. He was a fantastic salesman and would be one of the world’s best Money Managers, if not for the unfortunate fact that he was a fraud. He persuaded his clients that he had only limited capacity, and was only able to let in his friends/contacts as investors. His perceived “exclusivity” made investing in his firm all the more attractive. Certain investors prefer to allocate in “cool”, “selective”, hedge funds, as opposed to boring mutual funds, precisely because hedge funds are not broadly marketed to the hoi polloi. Similarly, in the past few years actors and professional athletes (neither historically groups known for investing acumen) have been piling into seed-stage technology investing because it’s seen as “cool”.