Institutional boards commit a massive governance error by obsessing over benchmarks
Seth Masters · Seth Masters – Investment Polymath (Capital Allocators, EP.38) · Jan 29, 2018 · at 28:30
Seth Masters discusses institutional asset management governance blind spots during an interview on Capital Allocators.
0:00 / 0:40exact quote · 40.7s
720p mp4 · rendered on demand · StarZero watermark
“Now, in my experience, most boards and other bodies that are overseeing pots of money end up spending surprisingly little time on that issue of What are we here to achieve, and how do we make sure that we're maximizing the chances of succeeding at that and minimizing the risks of failure? They tend to spend a ton of time on, let's take this huge pot of money that we have, divide it up into lots of little buckets, set a benchmark for each of them, and look at exactly which buckets we are doing a little bit better than that benchmark in, or a little bit worse, and then focusing, especially on the ones where we're doing a And to me, that's a massive governance error.”
quote is from the automated transcript, cleaned for reading: filler sounds and stutters are removed, nothing is rephrased. names can be misheard (the analysis reads context, assessments check outside sources). how →
More from Seth Masters
China can sustain 5% to 6% growth without infrastructure spending
“That part of GDP is actually growing quite robustly and will continue to grow, I think, for another at least five to seven years, maybe even 10, but also not forever. And because that's growing at almost 10% a year now, and it's about half of the Chinese econo…”
Low-volatility risk models will misclassify normal downturns as extreme anomalies
“If we are going to see a transition from abundant liquidity to less abundant liquidity, the risk of something going wrong and the penalty for that thing going wrong when it does are going to be higher than what we've experienced recently. And when that happens…”
Industry reliance on third-party risk models creates severe systemic market risk
“Almost everybody these days actually uses risk models that someone else developed. There's only a few someone else's, and they're all competing with each other in a marketplace. So guess what? There's conversion thinking on this, which is really bad, because e…”
Masters: Investors who exploit common risk model vulnerabilities will make fortunes
“What I think you're going to see is that the people who understand where those vulnerabilities are and think about that creatively are going to make a lot of money off of it.”
Masters: The next inflation surprise will throw markets completely haywire
“And so when we do have the next inflationary surprise, It's going to throw all of this completely haywire and it's going to be underpriced in the market as well.”
Major inflationary episodes occur a generation apart as institutional memory fades
“If you look at inflationary episodes, they tend to occur about a generation apart. And I don't think that's a coincidence. I think that inflation is such a huge systemic problem when it happens, and so devastating to both the financial system and also the poli…”