Harvard professor and Alignvest Investment Management partner Randy Cohen outlines what the investment industry needs to do to offer true innovation
As a senior lecturer of entrepreneurial management at Harvard Business School, Randy Cohen uses a ‘design thinking’ approach when explaining how to launch a business. The strategy is applicable whether you’re selling a mutual fund or a smartphone; it basically involves a lot interaction with different people before bringing a product to market. It’s a drawn-out process, but Steve Jobs didn’t start selling his first Mac in a week. Budding entrepreneurs can expect to log a lot of hours and go through many setbacks before they have the product they want.
“Entrepreneurial people have a tendency to believe that if you sit and think for a long time, or if you talk to a couple of your smart friends, that will solve the problem,” Cohen explains. “That is a piece of it, but you need to show your idea to lots of potential customers, and they will tell you what you wouldn’t have thought of otherwise.”
In addition to lecturing at Harvard, Cohen lends his expertise as a consultant to burgeoning businesses across various industries. A partner with Alignvest Investment Management, a firm that prides itself on ingenuity, Cohen places a lot of importance on being a leader rather than a follower.
“Anything that worked really well 20 years ago probably still works, but probably doesn’t work nearly as well,” he says. “That’s true in all businesses. When it comes to investing, when something is a good idea, you will see people latch onto that.”
These days, Canadian investors have a huge selection of stocks, bonds, mutual funds, ETFs and an ever-increasing amount of alternative strategies to choose from. Regardless, Cohen believes true innovation is still hard to find in this industry. This is a topic he has devoted a great deal of time to. The paper he co-authored with Joshua Coval and Lubos Pastor in 2005, “Judging Fund Managers by the Company They Keep,” was nominated for the Smith- reeden Prize for best asset-pricing paper published in the Journal of Finance.
“The problem is that at any given moment the vast majority of money will be managed in products that have been around for a long time,” Cohen says. “In theory you can have a fund that has been around for a long time and has evolved and changed, but really that is fairly unusual. Most funds have their principles that they follow, and investors don’t expect them to change. But if you are investing in those funds, it will be very hard for them to match the performance that earned them their reputation.”
The beauty of diversification
Managing a portfolio that beats its benchmark has proven to be a difficult proposition for active managers in recent years. As an asset manager, Alignvest prides itself on having dedicated alternative strategies that investors can’t find elsewhere. The firm models its portfolios on leading pension and endowment funds, so the long view is always the main concern. It is a complex process involving experts with decades of experience in their chosen field, but there is one constant when it comes to these funds.
“We are huge believers in diversification – everyone involved with investing recognizes that the one free lunch is diversification,” Cohen says. “We absolutely look for investment opportunities that are uncorrelated with other assets in our portfolios. Another way we can really help investors is by identifying strategies that haven’t been around a long time. It means we have to be constantly on our toes.”
Resilient funds
When Cohen wrote his paper on fund managers in 2005, he was analyzing a very different industry than the one we know today. The financial crisis of 2008 still looms large in the collective mindset, which naturally affects investment strategy. Cohen doesn’t waste time trying to predict when the next correction may be; rather, he concerns himself with constructing funds that can prosper through different market cycles.
“I remember going through the crisis of 2008–2009, and people were asking if they should get out of stocks,” he says. “What you have to do is change that mentality. You have to think in terms of times when you are 45% stocks and other times when you are 58%. It’s not a question of getting out or getting in – it’s a matter of shifting.”
Another consideration, in addition to the investment vehicle itself, is the fact that we live in an era of globalization. If Canadian equities are dragging on your portfolio, as they would have in 2015, you can easily switch to other geographies. Being able to change course as circumstances dictate is essential for a successful fund manager; being dogmatic on strategy will only lead to underperformance in the long run.
“If something is happening in the oil or minerals markets that is good or bad for Canada, you try to identify those times and then decide if you want to have a stronger or weaker position,” Cohen says. “The key is to not be too arrogant and recognize that the goal with each decision is to make intelligent, moderate adjustments that add moderately to value.”
Combining these different considerations will make for better funds and ultimately higher returns for investors. It’s the MO of any asset manager, although finding the people who can mould such strategy doesn’t come easy.
“If you add a moderate amount of value looking at the asset allocation level with stocks, bonds and real estate,” Cohen says, “then add a moderate amount of value by being in the right region at an attractive time, then add a significant chunk of value by finding the right strategies and the right managers to implement the strategies – when you add up all those theses, there will be quite a lot of value-add across the different dimensions.”
“Entrepreneurial people have a tendency to believe that if you sit and think for a long time, or if you talk to a couple of your smart friends, that will solve the problem,” Cohen explains. “That is a piece of it, but you need to show your idea to lots of potential customers, and they will tell you what you wouldn’t have thought of otherwise.”
In addition to lecturing at Harvard, Cohen lends his expertise as a consultant to burgeoning businesses across various industries. A partner with Alignvest Investment Management, a firm that prides itself on ingenuity, Cohen places a lot of importance on being a leader rather than a follower.
“Anything that worked really well 20 years ago probably still works, but probably doesn’t work nearly as well,” he says. “That’s true in all businesses. When it comes to investing, when something is a good idea, you will see people latch onto that.”
These days, Canadian investors have a huge selection of stocks, bonds, mutual funds, ETFs and an ever-increasing amount of alternative strategies to choose from. Regardless, Cohen believes true innovation is still hard to find in this industry. This is a topic he has devoted a great deal of time to. The paper he co-authored with Joshua Coval and Lubos Pastor in 2005, “Judging Fund Managers by the Company They Keep,” was nominated for the Smith- reeden Prize for best asset-pricing paper published in the Journal of Finance.
“The problem is that at any given moment the vast majority of money will be managed in products that have been around for a long time,” Cohen says. “In theory you can have a fund that has been around for a long time and has evolved and changed, but really that is fairly unusual. Most funds have their principles that they follow, and investors don’t expect them to change. But if you are investing in those funds, it will be very hard for them to match the performance that earned them their reputation.”
The beauty of diversification
Managing a portfolio that beats its benchmark has proven to be a difficult proposition for active managers in recent years. As an asset manager, Alignvest prides itself on having dedicated alternative strategies that investors can’t find elsewhere. The firm models its portfolios on leading pension and endowment funds, so the long view is always the main concern. It is a complex process involving experts with decades of experience in their chosen field, but there is one constant when it comes to these funds.
“We are huge believers in diversification – everyone involved with investing recognizes that the one free lunch is diversification,” Cohen says. “We absolutely look for investment opportunities that are uncorrelated with other assets in our portfolios. Another way we can really help investors is by identifying strategies that haven’t been around a long time. It means we have to be constantly on our toes.”
Resilient funds
When Cohen wrote his paper on fund managers in 2005, he was analyzing a very different industry than the one we know today. The financial crisis of 2008 still looms large in the collective mindset, which naturally affects investment strategy. Cohen doesn’t waste time trying to predict when the next correction may be; rather, he concerns himself with constructing funds that can prosper through different market cycles.
“I remember going through the crisis of 2008–2009, and people were asking if they should get out of stocks,” he says. “What you have to do is change that mentality. You have to think in terms of times when you are 45% stocks and other times when you are 58%. It’s not a question of getting out or getting in – it’s a matter of shifting.”
Another consideration, in addition to the investment vehicle itself, is the fact that we live in an era of globalization. If Canadian equities are dragging on your portfolio, as they would have in 2015, you can easily switch to other geographies. Being able to change course as circumstances dictate is essential for a successful fund manager; being dogmatic on strategy will only lead to underperformance in the long run.
“If something is happening in the oil or minerals markets that is good or bad for Canada, you try to identify those times and then decide if you want to have a stronger or weaker position,” Cohen says. “The key is to not be too arrogant and recognize that the goal with each decision is to make intelligent, moderate adjustments that add moderately to value.”
Combining these different considerations will make for better funds and ultimately higher returns for investors. It’s the MO of any asset manager, although finding the people who can mould such strategy doesn’t come easy.
“If you add a moderate amount of value looking at the asset allocation level with stocks, bonds and real estate,” Cohen says, “then add a moderate amount of value by being in the right region at an attractive time, then add a significant chunk of value by finding the right strategies and the right managers to implement the strategies – when you add up all those theses, there will be quite a lot of value-add across the different dimensions.”
