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Rating ? Qualities ?
Applicable
Background
Insider's Take

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Capital Allocators
How the World's Elite Money Managers Lead and Invest
Ted Seides • Harriman House © 2021

Take-Aways
• Interviewing is one of the main skills required of chief investment officers.
• CIOs also must become proficient at decision making.
• Negotiating is another foundational talent for CIOs.
• In investment management, leadership and management are often-ignored but crucial disciplines.
• Communicating with and appeasing oversight boards are constant challenges for CIOs.
• Investment strategy is the building block of long-term success.
• The investment process is where the CIO implements the broader strategy.
• Courting new money managers is a slow, deliberate process.

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 Recommendation
Chief investment officers can make big money, but succeeding in this high-stakes field means candidates
must possess a well-rounded set of skills. In this practical and perceptive manual, money manager Ted
Seides draws up a playbook for aspiring CIOs. Seides bases his advice on a combination of his own
experience and the insights he has gained by interviewing other investment officers on his Capital Allocators
podcast. To establish a career, Seides says, you'll need to master both relationship building and the
discipline of setting investment goals and sticking to them.

Summary

Interviewing is one of the main skills required of chief investment officers.

CIOs must be adept in a variety of areas, but one fundamental ability involves interviewing money
managers, which a CIO might have to do two or three times a day, every day, over the course of a
career. Gaining knowledge during an interview is something of an art – you need to prepare enough so
that you don’t waste time asking for information you could easily find through a bit of online research. But
you also don’t want to approach the conversation with such a rigid list of questions that the discussion
becomes robotic. A good interviewer strikes a balance between putting the interview subject at ease while
also eliciting meaningful answers.

“I once backed away from an investment after playing golf with a manager and
observing how abysmally he treated the caddie.”

One way in which to gain insight is to find a neutral or informal setting. Scott Malpass, the former CIO at
Notre Dame University, would take money managers to football games. Restaurants and golf courses also
can be fruitful territories for interview sessions. Some strategies for conducting successful interviews are:

• Build a personal connection – Talk not just about business but also about family and hobbies.
• Get to the point – Resist the temptation to talk about how smart you are or show off how much
research you’ve done. Ask short, simple questions.
• Ask how, what and why – Open-ended questions invite expansive answers.
• Ditch the list – Preparation is important, but don’t hew too closely to a written set of questions.
Instead, focus on what the manager is saying and then ask thoughtful follow-up questions.

CIOs also must become proficient at decision making.

The next skill in the CIO toolbox is the ability to make sound decisions. Unfortunately, human biology
dooms people to all sorts of biases that can sabotage decision making. When groups are involved, the
task gets even harder. Making good decisions requires careful attention to the social setting around team
discussions. One surefire strategy is to pursue “cognitive diversity”: The CIO’s team should include members
who think differently from one another. And the CIO needs to give these contrarians “cognitive safety” – the
security to know that they can disagree with the boss without being punished.

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 “We are hardwired to make bad decisions even after we learn all the ways we are
conditioned to muck it up.”

Making logical, unbiased decisions is no easy task, but there are some ways to tilt the balance in your favor:

• Learn the right lessons – Too often, investors credit themselves for good outcomes and blame others
for poor results. The reality is that sound decisions can turn out poorly, while sloppy decisions can
produce a victory. When analyzing your decisions, don’t discount the role of sheer luck.
• Keep a “decision journal” – When you make a call, spell out your rationale. This allows you to go
back and learn from your decisions, both wise and unwise.
• Form a “decision group” – Learning from decisions requires an honest and open analysis of choices.
Bring together a group of people who are willing to dissect decisions without seeking to deflect blame.

Negotiating is another foundational talent for CIOs.

Negotiations large and small are part of a CIO’s everyday life. Manager compensation is the most obvious
example, but many decisions with smaller stakes are subject to bargaining. To be an effective negotiator, you
must grasp negotiating’s basics. By definition, a negotiation involves two parties, and both want something.
The skilled negotiator identifies the desires of both sides and then finds a way to meet them. The simplest
part is pinning down your own interests – what you want and why. But it’s crucial to think about the other
party’s interests. They aren’t always plainly evident. Contingency planning is also important: This is the
exercise of deciding how to respond should the counterparty not agree to your conditions.

“The biggest mistake negotiators make is inadequate preparation.”

Here are some tactics for improving your game at the negotiating table:

• Know your value – Negotiations rarely take place between evenly matched parties. If you’re the more
powerful player, you can call the shots. If you’re the less powerful player, you’ll need to get creative about
identifying what you bring to the table and how the counterparty can benefit.
• Look for “smart trades” – Not all variables in a negotiation are weighted equally. Savvy negotiators
seek areas in which they can accept a trade that’s a major victory for one party and only a modest loss for
the other side.
• Be careful about going first – Being the first to name a number creates a precarious situation. If you
do this without thorough information, you can put yourself at a disadvantage. However, if you have a
good idea about the range of possible outcomes, going first won’t hurt you.
• Be willing to walk away – Simply leaving the negotiating table is a powerful gambit. And yet many
negotiators can’t bring themselves to execute this basic strategy.

In investment management, leadership and management are often-ignored but

crucial disciplines.

CIOs climb the career ladder based on their proficiency at these three skills – interviewing managers,
making investment decisions and negotiating. But they get little formal training in leadership and
management. That’s a problem, because to be successful, CIOs must inspire their employees. Leadership is

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 just one part of the people puzzle. The next step is management – the day-to-day oversight and support of
the human capital that’s required for the implementation of a broader vision.

“Money managers have a reputation for being less talented with people than with
capital.”

Strong leaders excel in these objectives:

• “Define a vision” – This is a critical starting point. A leader must create a roadmap that shows where
the team is going while also explaining why that’s the destination.
• Set the tone – Great leaders create an example and establish standards. Famed basketball coach John
Wooden, for instance, introduced his players to his uniquely detailed approach by devoting the first
practice of every season to teaching players how to tie their shoes.
• “Communicate consistently and frequently” – Defining the vision and setting the tone aren’t one-
time tasks. They’re a constant mission, and successful leaders repeat their core messages.
• “Behave authentically” – For communications to sink in, the leader must adhere to standards, just
like everyone else.
• “Inspire and motivate” – This task gets complicated, because every team member is motivated
by different rewards. To keep it simple and consistent, leaders should act as cheerleaders for their
teams, encouraging and supporting their people.
• Be flexible – Constantly adapting and evolving are requirements for any leader.

Communicating with and appeasing oversight boards are constant challenges for
CIOs.

CIOs are responsible for someone else’s money, not their own. That means every CIO submits to some form
of governance, which requires effective communication. In the simplest set-up, a CIO runs a family office,
and the governance structure consists of a family member or two. In the most complicated model, a CIO
invests on behalf of a giant pension fund, such as the California Teachers’ Retirement System (CalSTRS) or
the California Public Employees’ Retirement System (CalPERS). These giant organizations are governed by
boards that approve or reject a CIO’s recommendations. Routine tasks such as hiring investment managers
are subject to numerous bureaucratic requirements.

“Once a CIO has their bearings, they will find that their authority to make investments
can range from full responsibility to none.”

The CIO’s leeway varies from one organization to the next. Some funds and endowments allow the
chief investment officer to make most calls about asset allocation and hiring outside managers; other
organizations require board approval for those decisions. The salient point isn’t necessarily the level of board
authority but the consistency of that governance. In well-functioning funds, the process remains the same
from one month to the next. In dysfunctional organizations, processes are less predictable. CIOs are wise
to treat communication with the board as an important part of the job. By being in frequent contact with
members of the governance board, the CIO can build a reserve of credibility and goodwill that will go a long
way in maintaining cordial relations.

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 Investment strategy is the building block of long-term success.

Endowments manage for a timeframe that might be referred to as “beyond the long term.” CIOs must
balance the needs of today’s expenditures with the value of assets far in the future. This creates something
of a disconnect. The time horizon of any institutional investor is far longer than the career of even the
longest tenured CIO. This can test a CIO’s ability to stick to an investment thesis even through tough times.
A baseball analogy is in order: The Houston Astros endured five seasons of abysmal records to build a club
that eventually won the World Series. By the same token, a CIO must have the endurance to stick to the
investment plan, even when results are poor.

“Moving away from a set of asset class targets builds flexibility into the investment
process.”

Some CIOs chafe under tightly defined asset classes, a prescription that can force investors to pass on
promising investments. As a result, some CIOs have experimented with new definitions of asset classes.
Notre Dame’s Malpass cut the number of asset classes to three from six, a change that allowed for more
flexibility. At MIT, the CIO shifted to an allocation that focused on strong managers rather than specific
asset classes.

The investment process is where the CIO implements the broader strategy.

The CIO must turn the plan into action. This is no simple task – the choices include nearly 4,000 US stock
funds, more than 5,000 international equities funds, 4,800 bond funds, 8,000 hedge funds and more than
5,000 venture capital funds. Add in real estate funds and other choices, and CIOs have more than 34,000
funds from which to choose. Most investment offices can analyze no more than a few hundred of these
options in any given year.

“A well-defined investment philosophy and strategy helps allocators narrow the massive
universe of potential investments.”

CIOs can pare down the choices through a few common strategies:

• Screening out the funds that don’t fit – CIOs simplify the choices by filtering out funds that are too
big, too small or that fail to meet some other objective criteria. By definition, this will rule out some good
options, but there’s really no other way to focus the investment staff’s attention.
• Seeking referrals – Savvy CIOs realize that the managers they’ve chosen are top performers.
Therefore, they ask the managers to recommend other promising managers.
• Networking – CIOs remind their teams that scouting for managers is an ongoing task. Some CIOs also
hire outside consultants to help with networking.

Courting new money managers is a slow, deliberate process.

Before moving assets, a CIO can spend years getting comfortable with an outside money manager. This
process can include a series of meetings and an assessment of how well the CIO gets along with the manager.

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 This subjective reading is important. A CIO and a manager might go through tough markets together,
and the relationship will be tested. Subsequent meetings should delve into topics such as the manager’s
investment process. Of course, face-to-face meetings can tell a CIO only so much. CIOs also engage in
extensive background checks of managers. This includes checking references, talking to the manager’s
competitors and scrutinizing publicly available information.

“Human behavior leads to performance chasing from both managers and allocators.”

Because hiring managers is a time-consuming process, CIOs strive for long-lasting relationships. However,
after the CIO has hired a new manager, the assessment process doesn’t end. Volatile markets can expose
undesirable tendencies, such as hubris. And some managers can respond to tough times by shifting away
from their stated investment strategies. This is why astute CIOs must closely monitor outside managers.
Pertinent issues include the amount of risk in the manager’s portfolio, along with any unusual turnover in
the manager’s staff.

“Modern data analytics help managers recognize and improve their portfolio
management prowess.”

“Style drift” is one common issue among managers, and it’s something to which CIOs should be alert.
For instance, if a manager’s big wins involved small-cap stocks, a shift toward mid-cap names could
signal trouble. A new breed of data analysis tools allow CIOs to examine such issues with a greater level of
accuracy.

About the Author

Ted Seides spent 25 years as an institutional investor, allocating capital to money managers. He started his
career at the Yale University Investments Office and later founded an alternative investment firm. In 2017,
he launched the Capital Allocators podcast, a series of interviews with leading CIOs.

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