There’s a Lot of Noise Out There

Ask a CIO #42

April was an interesting month, to put it mildly. Higher (a lot higher) than expected tariff announcements sent equity and bond markets down in early April. And then, with the wave of a few tariff pauses, markets largely recovered.

Now we seem to be in this strange place where markets mostly ended where they started, but the fundamentals of the economy have almost certainly changed. Or maybe not? Until more data comes out, we’re stuck talking about feelings (and broadly speaking, we apparently do not feel great).

This week’s question was sent to me a few months back, but under the circumstances, it’s probably even more relevant today.

Amidst the sea of newsletters, sell-side and buy-side reports, industry analyses, hourly news updates, GP discussions, etc. – how do institutional investors maintain and preserve independent thinking?

I think there are actually two different, but equally valuable, considerations embedded in this question. The first is, how do institutional investors stay clear headed in that aforementioned sea of newsletters, reports, news updates, etc.? In other words, to use the familiar refrain, how do they separate signal from noise?

From a practical standpoint, large institutional portfolios have some structural advantages when it comes to tuning out the noise. Given their size, complexity, and liquidity constraints, these portfolios naturally demand a long-term mindset. It would be not only inadvisable for an institutional investor to react to the daily news cycle, it would be highly difficult to quickly shift portfolio exposures in a big way.¹

The other significant advantage inherently available to institutional investors is access to the bottom-up insights and data from a large cross section of GPs. As their portfolios are invested in a multitude of strategies, institutional investors can aggregate data points from across public and private markets. Institutions can then triangulate toward potential signals if and when they hear recurring themes or concerns. And, on the flip side, these conversations can also add nuance and context to counterbalance macro headlines.

To use a simplistic example, a surface-level macro assumption might be that industrials investments will suffer under the new tariff policy. And within an investor’s private equity portfolio, one GP might validate that perspective, sharing that they’ve advised their companies to be defensively prepared, preemptively drawing down credit lines, etc. Another GP might report that their industrials companies have primarily domestic supply chains and expect to be net beneficiaries from policy shifts. Multiplied across many conversations with many managers, these granular perspectives should offer a clearer picture of risks and opportunities while also keeping the investor from over-indexing to the viewpoints of any one GP or news source.

Going back to your original question and the challenge posed by the perpetual news cycle, a cynic might quip that the daily flow of market information is designed to keep people busy rather than informed. Sure, short-term, trading-oriented investors might benefit from parsing every data point. But institutional investors who are longer-term oriented are likely to find the constant data stream to be more distracting than useful.

And if I can be totally blunt here for a moment, one source of distraction comes from the potential for macro headlines to attract attention across institutions. While the members of an investment office are intimately familiar with their institution’s portfolio and investment managers, other stakeholders – investment committees, senior leadership, donors – aren’t in the weeds every day. These constituents understandably want reassurance when markets are volatile, and investment offices know they’ll need to devote time and resources to provide that context.

Now for the second consideration that your question raises, the one more explicitly stated: how do institutional investors maintain independent thinking? And here, as with most things, the answer is that it requires deliberate effort.

It should come as no surprise that institutional investors talk to each other. They talk to each other a lot. And that’s often a good thing – it facilitates the sharing of best practices and helps everyone stay informed on the goings-on across the institutional investor landscape.² But it also creates a real risk of groupthink.³

And here I’ll offer a partial, and probably not wholly satisfying answer. For an institutional investor, maintaining an independent mindset relies a lot on a simple principle: focusing on the institution’s specific priorities and capabilities. What’s right for one portfolio isn’t necessarily right for another. One institution may have more investment flexibility, another may have more portfolio liquidity, and a third may have a specific strategic advantage (e.g., a hospital system investor evaluating healthcare investments). These distinctions should enable the investors to pursue different portfolio approaches and naturally encourage independent thinking.⁴

Thanks for the great question (even though my response was delayed, your question certainly remained timely)! And as always, I hope you’ll reach out: askacio@ivyinvest.co.

See you in two weeks,
Wendy

1. I would argue these qualities are advantages, but of course, to some they might be deemed disadvantages. The much-discussed potential private secondary transactions of some prominent university endowments could be interpreted either way.

2. As an anecdote, I’ve observed over the years that there’s a fair amount of regional clustering in LP portfolios. Institutional investors based in the same city often have notable overlap in managers and strategies. It’s a totally understandable outcome considering the shared networks across investment committees and CIOs, but it’s still noteworthy given the topic at hand.

3. Perhaps you’ve heard the corporate refrain, “Nobody gets fired for buying IBM.” The parallel for institutional investors might be “Nobody gets fired for investing in [insert well-known multi-strategy hedge fund] or [insert large multi-stage venture firm].”

4. As a side note, I was recently catching up with some endowments and foundation friends, and the discussion turned to what strategies might perform best in the months ahead. There was very little consensus. There was collective agreement around what probably wouldn't do well. But beyond that, the ideas were varied, reflecting different perspectives, different portfolios, and different institutional goals.