Practical analysis for investment professionals
16 January 2018

Luis Viceira: Activism, Indexing, and the Investment Management Workshop (IMW)

What do the rising stars in investment management need to know to take the next step to the C-suite?

For 50 years, CFA Institute has partnered with Harvard Business School on the Investment Management Workshop (IMW), a seminar devoted to industry-specific strategic issues facing our profession.

As a past IMW participant, I had the privilege of discussing the seminar with Luis Viceira, who is also a senior associate dean of HBS and IMW co-chair for the past 17 years. Our wide-ranging conversation touched on his experiences with the workshop as well as the latest strategic developments in the investment management industry.

Paul Kovarsky, CFA: Let’s begin with your career with Harvard Business School . . . 

Luis Viceira: I joined the faculty in 1998, so we are heading now into 20 years on the faculty. I’m part of the finance faculty here at the school.

My entire career has been focused on capital markets, investments, and investment management. I have always been very much attuned to what’s going on in the industry through my case writing and through all my other work outside the school. I have had a very long‑lived interest in understanding this industry and what’s happening with it, what the trends are, and what we are getting right.

What inspires you to teach the Investment Management Workshop every year?

I have to say, this is one of the most energizing experiences I have during the year. I personally see it — and the rest of the faculty in the seminar see it — as a privilege. It’s a privilege to have a group of truly active, very senior people in the industry and promising stars coming together every year to discuss and talk about the latest trends.

For us, it’s a very enriching opportunity to interact with these people and to have them interact with each other around the themes and issues they care about. It’s extremely engaging and there’s always the energy to do it because everyone learns a lot from the experience — not just the participants, but also the faculty.

How is IMW different from other business school classes that you teach?

We all teach using the HBS case method, so in that sense, it’s not different for me. It might be different from what’s done in other business schools or other set‑ups. The key thing about this seminar is the workshop. It’s all case‑based discussions. That means we are discussing a situation that is relevant to those sitting in the room — something that is relevant and timeless, but also timely in the sense that we try to bring what’s happening now in the industry to talk about decisions that someone is making. That’s the essence of each case: It’s about something that probably most people in the room care about. We all put our brains together and try to think: What is the situation about? What should this person do? What would I do if I were in the shoes of this case protagonist?

It’s not a problem set, it’s not a very stylized situation. It’s actually a natural situation with all the complexity that comes from being a real situation: All the uncertainties, all what we know, what we don’t know, and how do we make that decision. What are the factors? People bring their own experience and their own knowledge from the industry and their own companies to wade into that situation and to that decision.

It’s very complex. There’s complexity in the situation, there’s complexity in the context. We try to make the best of that and make the best decision all together.

How do you decide on which investment industry themes to bring into the workshop?

HBS is very attuned to what’s happening in the industry. It’s very attuned because we write cases about what’s in the industry and we care deeply about bringing best practices to the classroom. We are naturally very interested in our industries. We are tightly connected to them in multiple ways. First and foremost, through our case writing and field research. But also through our active engagement in the industry. We sit on boards. We have consulting engagements with institutions. We are constantly talking to people. We bring practitioners to campus to visit us and to have discussions with us and with our students. We are not, in that sense, the ivory tower.

Most people, when they come to the workshop, one of the things that they write is, “I felt really engaged throughout. And thinking about IMW today, where my industry is heading now, and the various situations I’m confronting, I’m so glad I had an opportunity to discuss it with so many other bright people from the industry who understand it. I’m now in much better shape to confront those challenges.”

With these takeaways in mind, what makes someone an ideal participant?

We are very lucky to attract very interesting professionals to our workshop. A typical participant in our workshop is someone who is a rising star in an asset management organization, from asset managers to pension funds, sovereign wealth funds, endowments, or investment advisors. Executives who are carrying a few years of experience and are deeply involved in their organizations and in the industry, who are constantly looking for ways of improving and growing their organizations and willing to lead change and innovation.

We tend to have rising stars and senior management at these companies all come together. They are decision makers in many ways. Of course, they connect very deeply with what’s going on in the cases and the decisions we are discussing because they live through those things.

They also carry a lot experience in the markets and in the industry that they can bring to bear into our discussions. That’s what makes this place very special. Because people are, in a way, interacting with peers in that we curate the audience.

We really want to make sure that people have very diverse backgrounds and seniority, that they have in common their experience and that they are leaders in their own companies.

In addition to one third of the new cases each year, HBS also brings many C-suite-level guest speakers to IMW. How do you decide who are the right people to invite?

Well, for one, we try to bring the case protagonists. It’s always great when you are going through this situation to have the case protagonist listening and then interacting with the participants on how she or he thought about these things, how she was inspired by what she heard in the room, and, at the same time, sharing with the room how she thought about the issues. This “bringing the face to the case” is a huge enhancement to the learning and discussion experience.

Typically, the cases are on important themes that tend to involve leaders or rising stars in the industry, so participants get to interact with those people.

Also, every evening we have a keynote speaker. Our keynote speakers tend to be leaders of highly successful organizations, people who have led change and innovation in their organizations. In the spirit of continuous interaction, our speakers usually speak for no more than 15 minutes, and opens the floor for an open discussion with our participants. The goal is not for this person to talk for an hour. They open the floor for that engaged discussion with the rest of the participants in the program.

That’s where we spend the bulk of the time. It gives participants a chance to interact with the speaker on something, usually a big something, that’s going on in the industry, like the growth of indexing and what implications this is going to have for active investing. The keynote speaker is a thought leader and also a management leader who can talk meaningfully about that.

You mentioned the global audience. How do you and your fellow professors bring out the nuances of investment management industries from all over the world?

Some of the set‑ups are US-based, but some of them are not. We pride ourselves on being global citizens. I have served for a number of years as senior associate dean of HBS’s Global Initiative. HBS has a network of 14 centers all over the world whose main mission is to facilitate global field research and case writing and the interaction of our faculty with business leaders around the world. These centers have been highly successful in helping make the HBS curriculum and case library truly global.

We tend to have a natural interest in global businesses, and this network of centers makes much easier for us to actually look beyond what’s going on in the US. We try to build that experience back into the classroom. Today, money management firms are very global. The large ones certainly are global companies. If you think about the perfect example of a global company today, it’s probably one of the biggest asset management organizations in the world.

These companies are global in nature. It is always interesting to the participants to have a global component. Those things come to bear both in the curriculum that we bring to the program, and also in the composition of the participants.

Having said that, we don’t lose sight that the US tends to be a world leader in innovation of asset management practices. Many of the currently important topical themes in the industry are happening in the US. This is why what’s happening in the US is also a very important component of the program and the curriculum that we bring to IMW.

Regulation is another big global muscle movement. As someone on the board of a self‑regulatory organization — the US Financial Industry Regulatory Authority (FINRA) — you have a front-row seat to that. Can you share any high-level thoughts on trends in governance and regulation?

What we are seeing more and more — and this has less to do with regulation and more to do with governance — is with the growth of indexing. The interaction between asset owners, shareholders, and companies, how is that impacting that relation? How is that impacting board life?

We have seen an enormous growth in indexing. We also are also seeing significant growth in a new type of activism that is more like private equity in the public markets. These two trends are coming together in the boardrooms. How that is changing the governance of corporations is a very important topic. Everyone is very intrigued, as they should.

How are the boards of the next 10 years going to operate? What’s going to be their composition? What’s going to be the dynamics of those boards in a world where there’s such growth in indexing, where the top five asset managers in the world tend now to be indexers? They own very, very important stakes in corporations, public corporations, small and large. That’s a huge trend and a huge issue that everyone is thinking about. How’s that going to evolve is something that we discuss in the classroom.

It appears that some start on this path with one hypothesis in mind, and then end up elsewhere. In your academic research, did any conclusions surprise you?

One of the things I’ve been exploring through my case and field research has been thinking of the interaction of the growth in shareholder activism and the growth in index investing and more generally the growth of dispersed ownership through the growth in stock market participation by most people through the growth in DC plans, mutual fund investing, etc. Then realizing that these two phenomena are not independent of each other, that the emergence of the former is probably closely connected to the growth of the latter.

And, as activism grows on the back of the growth in indexing and dispersed ownership, it is interesting to see how it is evolving. It’s becoming more and more a way of bringing the private equity mindset of ownership and governance into public corporations.

In contrast to the short-term activism of the past, a few large activist funds are investing more and more capital and are interested in what I would call long‑term activism. This activism is not independent of the growth in indexing, because large index investment organizations tend to represent long-term investors — the participants in DC plans saving for retirement, for example. But by the nature of their own cost structure, it is hard to think of index investment organizations to be able to spend very large resources on corporate monitoring.

As indexing grows and becomes more and more important in terms of ownership of companies, one thing that you could argue has been happening is even bigger separation, or disengagement, between owners and managers. That has created a space where this long‑term activism is finding a way to actually reconnect the two of them. Its edge is in bridging that gap.

The evolution of large index investment management companies, and to be more concerned about corporate governance, and about thinking more about the role in being on boards, that’s been part of what I have been discovering through my own field research. How that connects to the activists, how the two are actually connected is an important finding and something that requires more thinking and more discussion.

I don’t think they are independent phenomena. I think they are two sides of the same coin.

Speaking of coins, what are your thoughts on the influence of blockchain and cryptocurrencies in the investment markets?

We need to separate what’s called cryptocurrencies from blockchain, which is the technology on which those currencies are built. I think blockchain technology will have staying power.

We are basically starting to discover the many uses of that technology in the money management industry. For instance, we are seeing some adoption of blockchain. Vanguard just announced that they are going to use blockchain to actually keep live information on their indexes, for the constitution of indexes, etc., for their own investment managers. Blockchain could revolutionize the custodial business. The blockchain is a very important and powerful technology that’s going to have wide-ranging implications for the pipelines of the investment management industry. It also has important limitations, like the vast amounts of energy that it requires to process transactions, the dependence on passwords and private keys that can be stolen, etc. These are limitations that hopefully technological progress will fix.

Cryptocurrencies, I’m probably more in the camp that thinks they are going to be here as long as we all agree to accept them as a medium of exchange and a store of value. There is no intrinsic value to them, no earning power, just the belief that if I hold a cryptocurrency which I got by paying a certain amount of real wealth, someone else down the line will be willing to take it from me in exchange for her or his own real wealth. Their value is that there’s a common acceptance of them as a medium of exchange and as such a medium of storing value. If that goes away, they become worthless.

Gold has been accepted as that exchange and that store of value for thousands of years. Will that be the case for cryptocurrencies? What do you think?

One thing is gold has been partly an accepted medium, etc., because of its permanence. The whole sense that if things go really, really bad, and I’m holding my gold, I have something that I can exchange for other things.

In a very dramatic situation where, say, our computers stop working, cryptocurrencies will be pretty much gone. It’s like gold issued by power companies in some way. Of course, a world in which power and computing networks are gone would probably be a world in which the value of our bitcoins would be the least of our worries.

I presume that if there is no electricity, it may be difficult for survivalists’ diesel generators to power up a network of bitcoin miners! You’re obviously super passionate about the investment management space. What keeps you going?

This is an industry that never sleeps . . .

. . . and neither do you from what your HBS colleagues tell me.

[Laughter] Understanding innovation in this space if one of the themes that most interests me. I try to explore it through my field research and case writing. This is an industry that never ceases to surprise us with new strategies, products, and services. You were just talking about cryptocurrencies or the uses of blockchains that could well revolutionize the pipelines of the industry.

There’s constant innovation in this industry. It’s a very competitive industry. It’s a very open industry where innovators can actually prosper. For someone who is intellectually curious like me, this is a wonderful evergreen field where there are new exciting things to think about and research coming up all the time.

This conversation surprised me in a couple of ways. For example, on the interplay between the activism and the proliferation of indexing. Likewise, I am sure, many participants in the IMW in June 2018 will be surprised, informed and inspired by you and the whole IMW experience. Thank you for the interview.

Thank you for spending time with me. I’m looking forward to seeing you at IMW next summer.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image courtesy of Harvard Business School

About the Author(s)
Paul Kovarsky, CFA

Paul Kovarsky is a director, Institutional Partnerships, at CFA Institute.

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