Every now and then you expect one thing from a book and discover something even better. That’s what I found from the book Delivering Alpha by Hilda Ochoa-Brillembourg. It was recommended by a good friend* who always provides me with new insights, so I shouldn’t have been surprised. The book describes what she has learned over that time, and the discovery was that the book was as much about how to manage as how to trade markets.
Hilda O managed the World Bank pension fund and then later the Strategic Investor Group fund for over thirty years. Over that time period she deliver returns of 1.4% above benchmarks, and 75% of the time her rolling three-year returns were above-market returns. Ray Dalio, founder of Bridgewater, hails her as “one of the great investors of the last 30 years”, and David Swensen, CIO of the Princeton endowment fund, observes “unlike Warren Buffett, who seems overly concerned with gross fees, Hilda recognises that superior managers over-come the fee burden to produce excess returns for their partners…the central takeaway from her book is that effective governance underpins success” .
Early on in the book she describes the importance of good governance: “Many times, poor governance inflicts more damage on portfolios than underperforming managers. Markets and managers recover from cyclical losses (mean reversion at work), but portfolios don’t easily recover from permanent losses by bad governance decisions”. She then foes to list the “common symptoms of poor governance by a board or investment committee”:
- High manager turnover
- Frequent committee or staff turnover
- A focus on what seems to have worked in the past three to five years
- Persistently negative or zero value added over seven years [so she assesses performance over cycles, rather than (say) the last year]
- Managers fired after relatively brief but painful underperformance
- Simplistic rules for hiring and firing managers
- A paint-by-numbers silo approach to asset-class structuring, which overlooks cross-over opportunities.
- High management costs relative to value added
- Conflicts of interest among fiduciaries [for example, a trustee may prefer to maintain friendships on the board, rather than disrupt things for the sake of the end-client]
These are principles to live by whether one is running an investment fund, bank or corporate.
* the friend is James Aitken, you can listen to some of his wisdom on this podcast