Survival Strategy: A Learning Investment Team

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PREVIEW: With our article “Survival Strategy: A Learning Investment Team“, 
the CFA Institute presents to its community how heuristics management,
smart documentation and ambiguity tolerance can increase
the competitive edge of an investment process. It is a great honor for us.

by Markus Schuller, March 30, 2017

Let’s call this “Schuller’s Law”: The less personal the variable to be optimized in an investment process, the lower the organizational resistance.

For example, if a CIO trained during his university years in modern portfolio theory (MPT) applies the mean-variance optimization, a request to use minimum-variance optimization will likely encounter little resistance. If the same CIO is asked to switch from correlation-based risk management to causality-based risk management, the resistance level will likely increase because this goes beyond the CIO’s original socialization. Resistance is usually greatest when the investment process variable relates directly to the individual, like optimizing the daily work routine, configuring the team role profiles, or reducing the knowing-doing gap.

Two structural factors dominate the underperformance of professional investors versus the market portfolio: the cost penalty and the behavior gap penalty. When optimizing an investment process, firms not only have to consider both penalties but also how minimizing each will generate differing levels of resistance.



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