Eliminating the “Human Element” Will Never Eliminate the “Human”

…investors pick people, not [funds].
— The Investor’s Paradox

The number of managers that now run systematic, quant-based investment strategies designed to eliminate the “human element” from the decision process seems to grow daily. On the flipside, I am not aware of a single institutional investor willing to totally eliminate the “human element” from their decision process (at least not yet).

Can you blame them? It would require an investor to assume a lot of career risk in order to totally remove herself from the decision process. Just getting comfortable with a machine-based ODD process seems hard to imagine – but human-free manager evaluation seems completely unfathomable at this point.

And until that changes, it will still boil down to the same thing... people investing in people.

After all, it’s the people that define the investment strategy, people that build the organization, and people that manage the operations. Sure - investors perform diligence on a fund - at the end of the day, though, they still make their investment decisions based on the people. The fund is nothing more than a vehicle to facilitate exposure to the decisions made by these people.

What’s funny is that when you say it out loud, it sounds absurdly obvious. We all know that this is a “trust” business. But based on how managers typically position their firms or prepare themselves for investor meetings, it’s clearly not.

Just so we are on the same page, I’m not referring to manager’s pedigree or experience. I’m referring to how managers express who they are and articulate the values and beliefs that drive their decisions. As Simon Sinek says, “The goal is not to do business with everybody who needs what you have. The goal is to do business with people who believe what you believe.”

It starts with investing the time to understand your own values. And then it requires doing the same to understand your target audience’s values. Unfortunately, very few managers are willing to stop long enough to put themselves through that process. Not only does that mean that they are more likely to be talking to the wrong people, it also means that they may be delivering the wrong message.

As David Allison, pioneer behind Valuegraphics, likes to say, “What we value determines what we do.” If you understand the ‘lens’ with which people look through in making decisions, you can tailor your message to trigger those values, and influence behavior to your advantage.

Demonstrating sophistication and ‘institutionality’ to go along with great performance will always be important. But it will never be important enough to convince an allocator to invest in your fund if you don’t gain their buy-in on the thing that ties it all together…you.  

By JD David