Agent/Triangle relationship


This is an interesting situation to analyze, and I had the opportunity to witness (albeit in a minor form) a minor version of a triangle relationship during my internship this summer. It may not fit the mold exactly, but the relationship provides similar actions to the standard triangle-agent relationship we have discussed. I worked as an intern for a major institutional investor in Chicago. The office is run by the CIO, who has an obligation to manage the portfolio in the best of her ability. She also had to abide by recommendations by the institution’s board of directors, and it was possible that the two parties wouldn’t see eye to eye. So the CIO acts as the agent, and the two principals being the external fund managers in the portfolio and the board of directors of the employing institution. The CIO and the rest of the senior staff met regularly with external fund managers, prospective or current, and then would (less frequently) meet with the board of directors to present the state of the portfolio, the performance of funds, and other minute details not really important to this scenario.

I never was able to observe a moment where the board and the fund managers didn’t see eye to eye on the performance of the CIO and the investment staff. Although, if either side were to have a differing view on what constitutes good performance, then the relationship between the agent and either party could start to deteriorate. If the board of directors thought that the CIO was not performing adequately (as opposed to the external managers who have appreciated the way the CIO has constructed the portfolio), then they may begin to question the CIO’s investment decision making process. The CIO needs to properly communicate her investment philosophy and process clearly to the board to avoid conflict, but they hired her for a reason. So the board would need to listen to the strategy and take that in accordance with the performance of the portfolio. The board of directors do not ever meet with the external fund managers, so they have to trust the CIO to make sound decisions and implement her style while considering the investment philosophy they have. If the tension level ever gets extraordinarily high, then the agent (CIO) could possibly lose her job. Same goes for the rest of the investment staff.

In this scenario, with the pressure of performance in a results-based business, the agent would definitely fail if they satisfied one party and ignored the other. If the CIO ignored the board of directors and hired managers that might not fit their investment views (the CIO had full autonomy in investment decisions, so technically this is possible), then the CIO would be putting her job, and the jobs of the investment staff at risk. On the other hand, if the CIO were to completely ignore the perspective of the fund managers and only adhere to the opinions of the board, it could hinder the investment relationship and the external fund could begin investing in ways that are not beneficial to the long-term goals of the portfolio. The CIO has to adhere to the guidelines and the philosophy of the board (and the institution as a whole), but she was hired to bring her own investment style and philosophy to improve the strength of the portfolio. That may require suggesting investment opportunities that the board may not have considered under previous investment teams, and these opportunities would strengthen the relationship with the fund managers – allowing them to utilize the institution’s investment and grow in a way that is mutually beneficial.



Comments

  1. Professor ArvanNovember 26, 2019 at 8:12 AM

    Here is an off-the-wall question for you. Could an algorithm be written out so that the portfolio choice was generated by the algorithm based on available data about asset prices and company performance? My sense of these things is that many companies have such programs running to find pure arbitrage opportunities. But you might also think of doing this to apply a certain investment philosophy. If something like that is possible, one might wonder what value add the CIO provides . It is something to consider.

    Then, it would be good to know who gets onto the Board and what interests they represent. I do want to note that individuals who hold a portfolio but have others manage it, do communicate their preferences (about how much risk to take, about specific assets they like to hold, and maybe other assets that they don't want any part of). If may be that the Board is comprised of some of the larger individual portfolios, or possibly some portfolios associated with businesses that hold some of their retained earning that way. But the Board may still not be totally representative of other investors. Further, there is the issue of how knowledgeable the Board members are, even if they are big investors. The one doesn't imply the other.

    I do think this is a reasonable example of the triangle problem. But let me note there is an additional issue, consider the CIO as an investor of her own funds and not just a manager of the portfolio. Is there some tension between doing well in both of those areas? That is something else to consider.

    ReplyDelete
  2. George Stigler Econ 490 fall 2019December 11, 2019 at 3:59 PM

    I apologize that I have not responded to this until now, I just realized I missed this one since it was over break.

    I think that the human element is extremely critical in investment decision-making, so I don't think any sort of algorithm could be developed to make the portfolio choices. Now, algorithms can be developed to help inform these choices, but shouldn't be used as a decision-making mechanism on its own. The CIO was hired specifically for her investment style and experience, and automating that decision making process mitigates the value that the CIO brings to the staff.

    I did not spend enough time there to completely understand how the members of the board are determined, let alone what their interests and personalities may be. They definitely communicate their ideas and preferences, but I'm not sure what personal tie-ins they may have with any of the external fund managers' portfolios. If there is any personal incentive tied to portfolio performance, this could have an impact on the nature of this triangle relationship. Because if the tie-ins of the board, and potentially the CIO, are impacted by different investment factors, then this could cause a conflict of interest between the two parties.

    ReplyDelete

Post a Comment

Popular posts from this blog

Team Structure

I have been in groups and teams that have been mildly successful, and some that have not been. By far, the most successful team that I was a part of was my high school Water Polo team, specifically my Junior and Senior year (2015 and 2016). What made the success even more meaningful was a period of under-performance during my Sophomore year, when we failed to reach the Sectional Final for the first time in a while (not sure on the exact year, must have been since at least 2008). For the next two, quite successful years, we had some added motivation due to previous “failure”. In 2015 we won the Sectional Championship against our rival school (who we had lost to three times earlier in the year). In 2016 we finished 3 rd in the state which at the time was the highest finish in school history. What I enjoyed about the structure of our team, specifically my senior year in 2016, was that we didn’t really have a single standout player or two, rather a larger group of good players to wo...
Read more

Discipline and Punishment Severity

It may be true that “draconian” punishments harden an individual. Those kinds of punishments, in most cases, tend to make the individual more severe and less sympathetic afterwards. When I think of these kinds of punishments, I immediately think of sports coaches. In that context, they have the goal of strengthening individuals, more so mentally than physically, and they (the coaches) gain from having the individuals (the players) having less sympathy as it helps them reach their objective – winning the game/contest/whatever they’re competing in. But in most contexts (work, group activities, etc), especially if the main goal is to strengthen the relationship and increase productivity, harsh punishments may not be the way to go. I’m thinking that draconian punishments are more of a short-term band aid to increase imminent production, but long-term it probably does more harm than help in terms of strengthening relationships and building mutual productivity and respect. I think that p...
Read more

Conflict and Group Dynamics

This conflict occurred in a work situation, although this time it was not between myself and a co-worker. Back working at the pool (the place I have been talking about in previous posts), I also was a swim coach. The club I worked at competed in a small, semi-competitive swim league that consisted of five other clubs from around the northern/western suburbs. I say semi-competitive because ultimately, we don’t care about winning and just want the kids to have fun, but there are two competitive championship meets at the end of the season where awards are given out. Some clubs (us, for example) didn’t really care about winning any of these awards, while others (usually those who have the better swimmers) will actively try to win these championship meets. Anyway, just for some background before I describe the conflict, I was the oldest coach (besides the head coach, who was also the club manager Matt), so I was viewed as the “senior” coach since I was the oldest and had been coaching...
Read more