Monday, December 1st, 2008
a small piece of pie

To continue with two themes of late — food and the lack of innovation at investment firmsthe research puzzle | The last posting, “gravy train detour,” was a Thanksgiving two-fer. — we turn to that most common and most boring of visuals, the pie chart:

That skimpy piece pulled out and ready to serve reflects the appetite of most investment firms for the truly new — and probably even overstates it.  The business is one of traditions, with change coming slowly and at most times only in response to the gravitational pull of “what’s working now.”  The hardest thing to do is to challenge the status quo and imagine that it might change, especially that it might change permanently.

Of course, the sizes of the pieces vary by firm, and at many small shops, “now” is really “then” and nothing much has changed or will change.  It is very hard to sustain such an approach for a long time.  For example, in recent years we have seen some equity strategies (both growth and value) that seemed evergreen fail in dramatic fashion.  The managers of them had looked to have it all nailed:  a focused fundamental philosophy, “proven” processes, a stable staff, and great historical performance.  But they didn’t see something coming, in many cases because their self-definition ended with a narrow approach that had always worked.  Until it didn’t.

Organizations that are dominated by quantitative approaches also are interesting case studies, because they have forces that push against each other.  By nature they have a testing orientation, and are constantly re-evaluating assumptions and looking for new answers, a critical inclination for successful research and development.  However, the raw material for analysis is that which has occurred, so it’s hard to be truly revolutionary; taking a prospective bet on something that can’t be demonstrated on paper doesn’t happen very often.

The large, multi-product firms are theoretically in the best position to drive innovation.  They have significant financial resources, large staffs, a broad network of information sources, and distribution power.  Unfortunately, they often suffer from a balkanization among asset classes and product lines that hinders the effective exchange of information.  The product development functions are usually not integrated sufficiently with the investment management capabilities, and they almost always are focused on product mimicry rather than creation — and backtesting rather than forethought.

It is natural that a “fierce urgency of now” drives how firms manage their affairs.  How financial instruments are trading (or not trading) triggers actions by decision makers, the ongoing success (or failure) of products guides further investment, and the shortage (or oversupply) of certain types of employees drives hiring practices.A.E. Feldman | This blog is a good source of information about hiring trends in the investment world.  As you would expect, those trends are a reactive product of the environment.  They are, by definition, mostly “now.” But when Martin Luther King coined that famous phrase — “the fierce urgency of now” — on the steps of the Lincoln Memorial, he was not just talking about the momentum of the day in the civil rights movement.   He was imagining what the future might look like, talking about what it would take to get there, and inspiring those around him to join with him to make it happen.

As far afield as that might seem from the business at hand, it is exactly what leaders do, be they preachers turned cultural icons or managers of investment firms.  Today becomes tomorrow, and those who have contemplated how things might change and have taken risks can accomplish great things.

If you need food for the journey, have a bigger piece of pie.  And dream.