Word from the author (belonging to the entry below about Fund Manager Selection by Institutional Investors)

Our entry about the activities of Institutional Investors and their investment styles – see below – is rather long. I am aware of the fact that readers don’t like blog entries to become too long. Normally we will limit our entries to some 1000-2000 words, like we did up until now.

However, because of the important link between actions by institutional parties and the current crisis, we did believe that it would be wrong to oversimplify things. We therefore decided to use 3000 words to explain things more rigorously.

I hope that the reader will appreciate this. By distinguishing between types of institutions, we learn a few things. First, some of the institutions invest like private investors, but with the an added knowledge base, whereas others are actually working in such a structure that the true specialists have insufficient power compared to non-specialists taking the main decisions. Result: awful mistakes, excess middle-of-the-road strategies, overconfidence in allegedly big names and not enough focus on performance and risk management.

To some extent we can therefore conclude that – whereas the system was supposed to rely on institutional investors being true specialists advising the non-specialists – institutions were instrumental in explaining the credit crisis and not in helping to avoid it.

On the other hand, the bravest of these institutions will probably also help us out of the crisis, together with Sovereign Wealth Funds. The Wealth Funds are a new category of investor that became important during the last 10 years. We will study them separately in a future blog entry.

For individual investors and their advisors reading the entry on Institutional Investors: we hope that our critical notes will help you in your decision process. Some are good in one thing, others in another and as a group they were disappointing. That is not to say that there aren’t true best-of-breed champions out there. There are, and we are of course pleased to help you finding them, when you come to the conclusion that it is too complicated to distinguish the good from the bad.

And of course, non-specialist institutional investors that have to invest: use a good consultant. Investing is complicated in and of itself, and knowing how complicated it becomes to take investment decisions in a decision structure in which you also have to incorporate the desires and demands of non-investors and/or take into account non-investment-related aspects (e.g. very important in family offices or endowments!), it is good to know who is good or bad in what.

That is what we try to achieve with or long piece. If instead of making you fall asleep, it will trigger discussion or comments, we will feel that our decision to write something too long for blog entry standards has actually worked!

Enjoy our next entry,

Erik L. van Dijk

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