Some of the the unfortunate realities of the investment business are as follows:
- All else equal, a talented sales staff will trump a talented investment staff when attracting capital from investors.
- The products that sound the best are often the worst ones to invest in.
- There are way too many investment products to choose from.
- It can be difficult to find good advice.
- Increased activity does not necessarily lead to better results.
- Specialists are not always the solution.
- You don’t always get what you pay for.
- It’s very difficult to understand the total amount of costs you are paying.
- The stock market is not rigged, but our emotions are.
- There are no guarantees.
Is this what they mean by "hugging the index"
Among other road-blocks here are some other "issues" that inhabit the institutional investment world.
Peer comparisons drive far too many decisions.- Institutional investing in some cases has turned into a relative game where they care more about what their peers are doing than their own personal goals. Time horizons for many of these funds are infinite, but all they now care about is beating their peers over the latest quarter. It’s madness.
Funds try to look the part.- Institutions are labelled “sophisticated” investors because they have so much money. Many try to look the part and make things more complicated than they need to be, often to their own detriment.
Politics matter.- When dealing with large sums of capital, wealthy clients and government organisations, you have to be something of a politician to succeed in this space. Much of the time will be spent marketing to get things done.
These funds are dealing with a group dynamic.- Institutional funds have board members, investment committees, consultants, money managers, regulators, beneficiaries and others all vying for attention. It can be extremely difficult to make wise decisions within a group construct where you have competing egos and goals.