The Anthropologists and the Pension Funds

Culture is much cited in the investment world but little analyzed.

The sociologist Pierre Bourdieu said, “Every established order tends to make its own entirely arbitrary system seem entirely natural.”  Norms become entrenched and are defended by those involved, even if they haven’t been reexamined in a long time.  In every part of the investment ecosystem there are prevailing practices — allocation frameworks, fee structures, roles, processes, theories, mantras, etc. — that are rooted in history, lore, and long-forgotten imperatives.

We think of anthropologists as studying tribes of one sort or another.  Can the techniques that they use provide a useful way to analyze investment tribes?  If culture is important, shouldn’t we learn how to evaluate it as best we can?

This posting (the first in a series) covers an evaluation of pension funds by John Conley and William O’Barr.  The quotations throughout are drawn from these sources, all written by them:

Fortune and Folly: The Wealth and Power of Institutional Investing (book).

“Managing Relationships: The Culture of Institutional Investing” (Financial Analysts Journal).

“The Culture of Capital: An Anthropological Investigation of Institutional Investment” (North Carolina Law Review).

“Pension Fund Management: An Anthropological Perspective” (conference presentation, no link available).

Other than the book, the law review article is the most thorough.  The conference presentation is also very good, although it is unavailable now (because CFA Institute thoughtlessly removed the transcript from its archive, along with many other valuable materials it has produced).

Each of the sources is from the early 1990s.  Despite the passage of time and changes in the environment, the conclusions are instructive.

The methods

The authors wrote that despite “the size and power of pension funds, very little is known about how these organizations actually work.”  So they interviewed people at nine funds (and at some of the asset management firms hired by the funds):

The anthropological method depends primarily on intensive observation and open-ended interviewing.  In crude terms, the anthropologist lives with the natives, learns their language, observes their customs and way of life, and talks with them at length.  The anthropological interview is relatively unstructured, designed more to encourage informants to identify and elaborate on issues that are important to them than to survey their views on issues that are important to the interviewer.

The “naïve perspective” of an interviewer using these methods yields a different kind of understanding than would come from a typical analysis of an organization by an investment professional.  Both points of view are important, but one is almost nonexistent in practice while the other is omnipresent.  That is a problem:

Business and finance are human enterprises, and human beings always behave in cultural ways.  Anyone who aspires to a real understanding of these enterprises must therefore come to terms with the culture of capital.

Major conclusions

The authors found that when interviewees were asked why they did what they did in their roles, they invariably focused “in the first instance on cultural rather than on economic or financial grounds.”  They talked about “cultural, historical, and personal factors” that framed their decision making.

Non-economic forces are powerful in all kinds of organizations, so it should be no surprise that that is the case with investment entities.  But that reality stands in contrast to the perception of the industry held by those outside of it, who expect decisions about investments to be driven by economic considerations.

One prominent finding came out in a variety of ways, referenced here following a section about indexing:

These comments about indexing suggest a preoccupation with responsibility or, more accurately, with displacing responsibility.  Comments about assuming, assigning, or avoiding responsibility were prominent in every interview we conducted.  Moreover, it appeared to us as naïve outsiders that decision making procedures in many funds had been designed almost with questions of responsibility in mind.

Two other observations:

A critical element in these accounts is that individuals’ perspectives on institutional structures and strategies are constrained by the time horizons of their own careers.

In our study of the nine funds, we were repeatedly struck by the lack of interest in questioning or analyzing the structures and strategies that had evolved.

The cultural and philosophical underpinnings for decision making were not regularly or intensively examined.  Changes occurred in response to significant external events or internal problems.

Public versus private

Of the nine funds, three were large public funds and the rest were for corporate plans.  In retrospect, the work by the authors took place at the time of a shift in the relative market influence of those two types of entities.

Many public funds have grown dramatically over the ensuing three decades.  Corporate plans are less prominent than they were, since company managements tired of the accounting rules that caused pension results and projections to affect the bottom line.  They embraced defined contribution plans to shift the long-term benefit burden to employees, and employed strategies to de-risk or jettison the responsibilities of legacy defined benefit plans.

Cultural differences between the public and corporate investment functions were identified by Conley and O’Barr.  Public funds were tied to the civil-service culture, so people were paid less.  Their decisions were also subject to public scrutiny from the media and pressure from political leaders.  Most working in the corporate pension world were transferred from other areas within the firm, sometimes taking them off the fast track of advancement.  The cultures within which they worked varied quite a bit:

Most private pension funds adopt the cultures of their sponsoring corporations.  To know the culture of the sponsoring corporation is to understand what makes the fund’s decision making tick.

In one sense, public and private investment staffers had the same jobs, but their environments were not alike.  That led to differences in the use of indexing versus active strategies, internal versus external management, diversification philosophies, organizational structures, oversight committees, and the willingness to engage with owned companies and the hot-button issues of the day.  Plus:

Most public funds are governed ultimately by diffuse, non-expert bodies.  Such bodies probably are “worked” more easily (to use our informant’s apt term) than are corporate executives and committees of corporate boards.

Private fund executives feel that they are bound by a version of the Golden Rule:  Do unto other corporations as you would want their pension funds to do unto yours.

Relationships

Relationships influence decision making.  Internally, connections (or frictions) among co-workers or with members of governing committees, etc. can sway opinions and actions.

And then there are the relationships with external asset managers, which can have the same kinds of effects.  Those relationships matter a great deal or asset management firms wouldn’t devote the sizable resources to them that they do.  Selection, evaluation, and retention aren’t just by the numbers.

Pension officials and asset managers need each other, but the authors gave a blunt assessment of the relationships based on their interviews:

Superficially, the relationship between pension funds and outside managers could be characterized as one of mutual contempt.  Rarely have two groups of people said such consistently terrible things about each other.  Within the pension funds, we heard that outside managers are not demonstrably effective and that they charge much too much for services.

The critical evaluation criterion in looking at outside managers was whether they were doing what they said they would do.  Did they implement the style the fund hired them to implement?  A “change in stripes” was the thing most feared.  As long as the stripes remained vertical or horizontal, as the case may be, firing was rare.

From the managers’ perspective, we heard how ignorant the people in pension funds are, how sophisticated presentations had to be condensed into a single page.  One manager referred to it as the Sesame Street version of the presentation.

And:

The dominant feature of the relationship between fund and manager is the illusion of control each has.  Fund executives would have you believe they control the quality of their managers’ work through a rigorous program of selection and evaluation.  At the same time, managers talk of how they control the selection process by pandering to the ignorance and insecurities of these same executives.

In fact, each group seems to be doing a successful job of patronizing the other, to their mutual benefit.  The managers’ performance typically hovers near the mean, so the fund executives are rarely embarrassed, while the managers are gainfully and profitably employed.  Whether all this attention to relationships promotes the interests of the pension beneficiaries, the sponsoring corporations, or the American economy is another question, and one for which no one we interviewed had a very good answer.

Lingering issues

Several of the ideas and issues that came to the attention of the authors are still with us.

Social investing.  For the most part, executives at several funds said that both ERISA and the prudent person standard “absolutely rule out so-called social investing.”  However, “some public fund officers take just the opposite view.”  The seeds of today’s ESG debate were germinating at the time.

Short-termism.  In the early nineties, the changes in corporate and investment behavior were such that there were concerns that short-term thinking was becoming destructive.  Some excerpts:

Although fund executives may speak of the hereafter in responding to charges of short-term myopia, the everyday discourse of the investment world focuses on the short term.

The advent of the computer has brought about daily scrutiny of performance.

We found a remarkable contrast between the way people are required to think for reporting purposes and the rhetoric of the long term.

The procedures for accounting to beneficiaries, corporate boards, and public trustees — just like corporate accounting procedures — are not based on the long term.

Professional rhetoric so constrains the investment world that a serious commitment to the long term is an act of intellectual originality as well as a burdensome undertaking.

The interviewees would often speak of the general problem while protesting, “Not us!”  The authors wrote about the notion of a “composite villain” — each fund was putting five or ten percent into strategies (like leveraged buyouts, the flavor of the day), which seemed small on their own but in the aggregate represented a substantial change in investor behavior.  Therefore, “It may be that pension funds contribute to short-term pressures in a subtle, cumulative way that is all but imperceptible to pension fund managers themselves.”

Gender.  Back then,

The world we saw was predominantly, but not exclusively, a male world.  We made a special point to talk to the women who were involved in pension fund management.  The small sample of women we had the opportunity to interview had a very different way of talking about the world.  As a matter of fact, many of them commented on the baseball metaphor [commonly used by men at the time], its inappropriateness, and its triviality.  Women enjoined us to think about investment, not in terms of sports, but in terms of duty and relationships.

The “market cycle.”  This vague but still widely-referenced notion for evaluating performance was put into perspective:

The market cycle seemed the most flexible of terms.  It was a way of arguing things in a highly abstract, but not very specific and certainly not statistical, manner.  A market cycle seemed to be an after-the-fact, post hoc rationalization of the way things went.

Official and unofficial versions

For naïve observers, Conley and O’Barr got to the essence of these organizations and as a result received a fair bit of attention from the industry for a short time.

The authors expressed hope that the unique structures of other institutions like banks and mutual funds would be studied in the future — and that the influential role that consultants played between asset owners and asset managers would be examined.  In subsequent postings, we will look at some other studies of industry players, but as the authors could have predicted, anthropological examinations are easily dismissed by the keepers of investment culture, so there hasn’t been a great deal of that kind of work.

It is easy to point to the limited number of organizations that were analyzed or the methods used (even though the same critique can be made of much investment analysis), but the conclusions were sound and captured the nature of the entities — and, for the most part, still do today.

To be fair, all of this is not unique to investment cultures.  At the end of the Q&A session following their conference presentation, the authors were asked how other industries would look.  Conley responded:

I think the structure of the findings would be the same.  Every field of endeavor has an official version — what anthropologists call the “normative version” — which is retailed to an audience, and the back-room version, which is the unofficial or “pragmatic” version of how things work.  The specifics would be different, but in any field, the official version and the pragmatic version of what is going on differ widely.

Getting past those narratives should be at the core of the evaluations of our counterparties.  Anthropologists can show us the way.