Smart Beta vs Smart Investment Teams

This article will highlight areas of improvement for professional investors to make better asset allocation decisions. Readers will learn in which areas investors can expect quick wins and where challenges will most likely occur. Examples will illustrate the insights found.

Regular readers of Panthera Solutions publications know about our track record as asset allocation intelligence provider with a strong research engine, allowing us to develop proprietary asset allocation tools and solutions. An initial retrospection will support the reader in categorizing the thought process of this article. Exemplarily, we highlight

  • that already back in 2012 — against the mainstream — we uncovered structural weaknesses of risk parity strategies (here),
  • our categorization of the Smart Beta factor zoo in autumn 2014, together with emphasizing the limitations of the Alternative Beta approach (here),
  • our unique effort in defining distinguishing characteristics of ethical and unethical asset allocation methodologies (here)
  • or our ground-breaking research in 2015 on comprehensively measuring the global capital stock (here)

This list is not self-promotion but should point out that it corresponds to our standard to work independent, clear and evidence-based. We perceive this introduction as necessary given the presumably soft theme of this article, in which we intend to categorize our academic and practical insights in establishing High Performance Investment Teams — HPIT (C).

As we concluded in our article “Man at the centre of the investment decision” in mid 2015, the underperformance of professional investors versus the market portfolio is dominated by two structural factors. See Illustration A.

Illustration A Structural Factors for Underperformance / Source: Panthera Solutions, Vanguard, Carl Richards

Cost Penalty

Defined as the amount of under-performance caused by transaction costs, management fees, distribution fees, etc.

Behavior Gap Penalty

Defined as the contribution of the human factor to a biased perception of reality caused by cognitive dissonances. Indicators of the penalty along the investment process can be certain market timing techniques, the application of flawed portfolio optimization techniques, minimizing career-risk as primary objective and other expressions of cognitive biases


Throughout our consulting work we gained the insight that in optimizing an investment process one not only has to consider both mentioned penalties, but also that minimizing both comes with different levels of resistance. See Illustration B.

Illustration B Organizational Resistance in Asset-Allocation Change Management / Source Panthera Solutions

Minimizing fees, for instance, triggers low organizational resistance. Exemplarily, the re-allocation into ETFs or the re-negotiation of transaction fees with brokers can be named. As a general rule professional investors acknowledge the advantages and follow our mutually prepared recommendations. Professional investors are equally willing to act when it comes to optimizing tax structures or implementing regulatory changes.

Increased organizational resistance becomes visible when Asset Allocation- related topics are concerned. There, one can distinguish between

  • Subject-specific input on methodologies, in which the professional investor (Investment Committee/Board of Trustees/CIO/ etc.) got academically or professionally socialized. In short, you do what you know.
  • Subject-specific input on methodologies beyond academic or professional socialization of the professional investor.

An example. If a CIO was trained during his university years in Modern Portfolio Theory and can apply the mean-variance optimization in his job, a requested change towards minimum-variance optimization will be accompanied by a low resistance level. Is the very same CIO requested to switch from correlation-based Risk Management to causality-based Risk Management, we can expect a significantly increased level of resistance, as it goes beyond his original socialization.

The highest resistance level can be found when investment process topics relate to the individual decider, like optimizing the daily work routine, configuring the team role profile or reducing the persons knowing-doing gap.

In short: the less personal the aspect to be optimized in an investment process, the lower the organizational resistance.


As highlighted in this previous article of ours, professional managers of other people´s money like regional banks, private banks, wealth managers, investment companies, (multi-) family offices, etc. are confronted for the first time in decades with a situation that forces them to

  1. either grow aggressively in size to play a shaping role in the industry´s concentration process,
  2. take on the competition with investment management fintechs in offering low-cost, fully automated wealth management solutions,
  3. position themselves as leaders in an investment management niche via innovation-driven competitive edge,
  4. or accept to be squeezed out of the market.

Options 1 and 2 are out of reach for most of the afore listed investment service providers as they are too small, too conservative and/or too loaded with overhead costs. Their will to survive assumed, Option 3 is the only one left.

If Option 3 it is, picking up on pseudo-innovations like running after fashion trends a la risk parity will be insufficient. Therefore, a learning organization with a continuous improvement cycle is a prerequisite for establishing and maintaining the innovation-driven competitive edge of the investment process in the chosen niche.


A learning organization with a continuous improvement cycle depends on knowing if and how it learns. For about 20 years, Knowledge Management has been a well understood and established driver of organizational change in other industries. The Asset Management industry widely ignores Knowledge Management in academia and praxis (see a meta-study of Stanford University, 2015). We regularly ask the investment management deciders/investment committees how they learn. Silence is the most frequent response.

To succeed in Option 3, a High Performance Investment Team (HPIT©) is key, being able and willing to oscillate between operational and meta-level in its qualitative and quantitative optimization of the investment process. Only then it can more consciously and therefore more rationally take decisions on whether certain parts of the investment process should be outsourced to quantitative tools (algorithms, big data analysis, neural networks, etc.), which rituals should support them to proactively manage minimizing their cognitive biases or how clients can be embedded in the learning process via expectation management techniques.

Evidently, a HPIT© has to work on investment process issues of low and high resistance levels. Only working on low resistance levels will not lead to a sufficiently significant competitive edge to succeed in Option 3. In other words, to transform investment teams into High Performance Investment Teams they have to go where it hurts. It therefore becomes inevitably personal. This is not a walk in the park. Though, if an industry has exceptionally high relevance for society and is rewarded over-proportionally well for it, equally high expectations have to be met. A logic that is considered surprisingly new in our industry.


Now, how to establish High Performance Investment Teams? We classify

4 levels of Change Management interventions in establishing HPITs as

part of the investment process optimization — see Illustration C.

Illustration C 4 Levels of Change Management Interventions /Source Panthera Solutions

All 4 levels consists of quantitative and qualitative optimization methods.

For instance, working on the Individual level of investment process deciders, work has to be done in establishing/facilitating certain skills, rituals and traits. The same has to take place on the Team-level by establishing/facilitating certain rituals and calibrating certain team characteristics.

Culture and Process define the game arrangement of an investment process. The meaning of it can be described as follows: we all know that the more often one plays at a Casino, the more likely it is that the house wins, even if a player can temporarily enjoy a lucky streak. A certain asymmetry in favour of the house is structurally embedded in the game.

The very same is true for the game arrangement in an investment process.

If a certain overachieving behavior of the individual decider, say high work ethics, is expected, while the same standard is not set as part of the team or organizational culture, it only is a matter of time until the individual aligns his behavior to the established organizational culture or leaves the organization.

Taken all together, investment process optimization can be started at the Individual or Team level to initially harvest low-hanging fruits, but if the Change Management process should leave a lasting impact on the organization, it also requires to be worked on the Process and Culture that is embedded in the investment decision making.

Establishing HPIT© goes beyond individual back-patting, some placebo-feel-good changes that work only on sunny days, some esoteric interventions waited-out by employees, knowing that the moment rough sea appears at the horizon old conflicts or rituals will emerge. The opposite is the case. HPIT© tend to continue their learning also during tough times. HPIT© are about lasting behavior modification of the individual, embedded in an eco-system of Team-, Process- and Cultural setting, facilitating a learning organization with a continuous improvement cycle.

Quod erat demonstrandum.


As initially explained, this article focuses on the categorization of academic and practical insights in establishing and managing High Performance Investment Teams. Panthera Solutions, as asset allocation intelligence provider, defines its competitive edge by its knowledge of best possible asset allocation principles and intervention methods to incorporate those principles. Please bear with us that we refrain from showing details with regards to asset allocation principles and intervention methods for competitive reasons.

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