How to Learn About New and Rapidly Growing Markets and New Industries

 

Part I of the Institutional Investor and Fund Manager Improvement Series:

How to Learn About New and Rapidly Growing Markets and New Industries
According to Investopedia, an “institutional investor” is a nonbank person or organization that trades securities in large enough share quantities or dollar amounts that it qualifies for preferential treatment and lower commissions.  Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves.  An institutional investor in general is an organization that invests on behalf of its members.

Examples of institutional investors include pension funds, endowment funds, commercial banks, mutual funds, hedge funds, and life insurance companies (see www.investopedia.com/terms/i/institutionalinvestor.asp).

The general “benchmark” for determining if an organization is an institutional investor is if it has $30 million USD or more of investors’ funds under management (or “AUM,” Assets Under Management).  In the United States, once an organization has $30 million USD or more AUM it may be required to register with the Securities and Exchange Commission (See the discussion at www.investopedia.com/terms/a/aum.asp   and www.sec.gov/divisions/investment/iaregulation/memoia.htm). Many institutional investors, including pension funds, hedge funds, and insurance companies, may be much larger with AUMs into the tens or even hundreds of billions of dollars. 
In light of the fact that institutional investors are often handling vast amounts of “other people’s money” (OPM), there has been a strong prevailing doctrine that these money managers should allocate assets in a very conservative fashion among various asset classes, such as certain types of (often conservative) bonds or stocks.  There has been much analysis and study of how and why institutional investors should be conservative with their funds’ management (See www.guidestonefunds.com/Funds/Listing/AssetAllocation/AssetAllocation/ConservativeAllocation, www.gostudy.io/blog/cfa-l3-why-banks-are-conservative-investors, and  https://corpgov.law.harvard.edu/2011/08/19/institutional-ownership-and-conservatism/ ).  There has even been quite a bit of discussion, study, and analysis on how to “de-risk” the investment portfolio for institutional investors. See: www.institutionalinvestor.com/article/3556626/whens-the-best-time-to-de-risk.html#.Wcv1OnuWyUk

Although institutional investors should be praised for their analysis, study, and practice of conservative financial assets management (especially since they are often handling the entire life savings’ of many, many different individuals), one is left wondering how and when institutional investors ever focus on learning of new investment opportunities and increasing (hopefully substantially) their clients’ overall returns and portfolios.  The simple answer is that there is really no focus whatsoever on exploring new and exciting growth industries or new markets by the vast majority of institutional investors.  The primary focus of institutional investors still is (and sadly has been) how to allocate assets among certain assets classes in a way that effectively limits risk (the primary objective) and hopefully produces some kind of return for their clients.  

The Critical and Final Question
How can traditional (i.e. conservative) institutional investors actually learn about new investment opportunities presented by growing industries, new companies, and new markets? 

The Answer?
They can’t, unless they undertake very significant and genuine changes to their entire approach of financial management and investment.

The Solution?
We are going to propose that institutional investors of all kinds must regularly invest limited portions of their investment capital in what would conventionally be known as a “risky” and “younger company” (yes, conservatism is still ruling the day), as such an investment will force institutional investors to complete an in-depth investigation of an entire company, its management team/practices, and a new industry.  The process will automatically create new ways of thinking and analyzing growth opportunities for the conventionally “hide-bound” institutional investors (as well as potentially learning new management practices and techniques for their own funds).

In addition, we are going to propose that institutional investors learn from early stage companies to solve some of their own management problems, as well as to improve their internal processes and overall performance.   Yes, institutional investors (especially non-venture capital institutional investors) can and should regularly learn from the entrepreneurial world in order to improve their own performance as managers.

In Part II of the series, we are going to explore how a typical institutional fund manager should approach what he or she thinks is a promising younger (and high growth) company for investment and how this process will result in improving the creativity, innovation, and thinking of this manager over both the short and long term. 


(1) There would be many critics of this article who might make the following argument/assertion: “I do a lot of reading of trade journals, newspapers, magazines, academic articles, books and websites to learn about new investment opportunities or new and growing industries. I don’t need to actually reach out to a new company and make regular investments to improve my overall performance, thinking, and management skills.”  We wouldn’t disagree that widespread and thorough reading and/or research is an effective method for learning of new and promising companies or industries.  However, and as will be discussed in more detail later, we contend that the actual practice, work, and discipline of regularly making “unconventional investments” (as least in the eyes of many institutional investors) is the only genuine way to effectuate improvement in performance of a fund manager.  Simply reading about a new or interesting company or industry won’t be sufficient; it’s the learning by actual practice that counts for the fund manager in the end.