In most cases we can do better, and we know it
They work. They meet policy. They don’t create problems.
They just… don’t quite deliver what they’re supposed to, really need to. And over time, that gap - between what they are and what people think they are - adds up.
Or, maybe more precisely, doesn’t.
Following a recent presentation, a board member of an $80 million foundation sent me a note.
Portfolio? Two largely-indexed funds. Doing what they’re designed to do, yet, simply not doing what the portfolio needs. They hadn’t labelled the portfolio, or their stewardship, as underperforming, yet their question was straightforward - what should we do?
Fair question. Albeit a late one. And to be fair, an easy place to end up since portfolios don’t drift off course all at once. They get there slowly, in ways that make sense at the time, usually with just enough policy and oversight to feel fine.
I’ve seen versions of this well beyond foundations. Individuals, families, treasurers, advisor models - and also some of the reasons why on the product or fund manager side too.
In another room not long ago, a group of very senior investment people were walking through a portfolio. Smart group. Real experience. Opinions on everything.
Equities got airtime. Alternatives were mentioned. Private equity, hedge funds, inflation protection - all the right categories were there.
Fixed income didn’t come up. Not once. That’s usually a sign. A sign the portfolio isn’t optimized from a total risk and return perspective. And often a sign the room isn’t especially comfortable with how that part has to connect to everything else.
There’s a version of this that shows up in more polite ways.
A family office portfolio manager once told me they stick to passive because it’s cheaper. Fair enough. So I asked how they evaluate results after fees. “We don’t,”she said.“That’s not our policy.”
So cost is measured - outcomes are… assumed? That’s not really a fee decision.
In a recent RFP process, a fixed income manager presented a track record that had beaten their benchmark. They didn’t however highlight that they produced roughly zero over the last five years and less than 2% annually over ten.
To be fair, they met their proposed mandate. Still, nobody in the room seemed to hear the loud record scratch demanding a pivot to the more important question - what exactly are we doing here?
Another conversation, different room. We were talking about total portfolio risk - not in theory, but where it actually sits. Two things came up that should be obvious but rarely are: that the right fixed income can enable more equity risk, and the fixed income bucket can quietly eat into equity’s risk allowance.
One total portfolio risk budget. Shared across every investment. Even the passive ones. Many of the portfolios I see - foundations, family offices, even some larger pools - aren’t built with that in mind.
There’s also still a surprising attachment to interest rates as the only story in fixed income. As if low, and potentially rising, rates are going to fulfill the mandate. Fixed income has evolved. Remember that bond prices fall when rates rise. Credit matters. Select mortgages matter. Quality securitized assets matter. The right private debt can matter. And, like any part of the portfolio, they only work properly when they’re sized, combined, and understood in context.
Pension funds deserve a mention here - but not as another example of the problem, because most aren’t. They tend to have the governance, the expertise, and the long-term discipline that other pools aspire to. In many ways they’re the benchmark.
But even the gold standard has constraints. Liability matching frameworks and investment policies built for a different rate environment can make it hard to move when opportunity knocks. Not because the people aren’t sharp - they are - but because the process wasn’t designed to be tactical. I watched a pension plan recently shift their short-term liquidity need to a liquid-alternative credit fund - gaining yield through a low-volatility credit exposure they’re already comfortable with, in a suitably liquid structure. Smart and simple. It almost didn’t happen because it didn’t fit neatly into their existing box.
One of the harder parts - especially for foundations - is that the math doesn’t give you much room. With distributions to meet, fees to pay, inflation to match - how do you earn 6-7% on average before you’ve even grown anything?
If you’re going to get there, wherever your “there” is, it needs to be the goal from the start of the race. Target returns and total risk are inputs, not outcomes.
To be fair, that portfolio math isn’t always front and centre. It lives in policy documents and long-term assumptions - not always in the room where decisions are made. With those set, you can begin to layer on selecting investment partners, properly assessing the portfolio, balancing today with future needs, forecasting liquidity, understanding capacity for illiquidity, and deciding whether newer asset classes or hedges belong - and whether you’re actually being paid for taking on that complexity.
It’s not that these questions aren’t known. They’re just not always answered. And rarely all in the same room. Trying to explain later why several of them were handled only adequately is hard. It doesn’t show up neatly in quarterly reports – sort of like the manager who failed yet still “beat the benchmark”.
I had a conversation with the head of a large Canadian foundation who told me alternatives weren’t for them. Too complex. Not necessary. He said alts with the same tone he’d use for WMD’s.
So we walked through what they actually owned - not labels, just exposures. By the end, nothing had changed on paper, except the realization that the portfolio was much more concentrated than they thought. It turned into a priority for the next board agenda. He called me back about alts and optimal portfolios and active management two months later.
None of these portfolios are disasters. Which is what makes this harder to see. They function. They pass reviews. They get approved. Nobody’s getting fired.
But line enough of them up and a pattern starts to show:
- fixed income treated as a placeholder instead of a tool
- alternatives added, sometimes reluctantly, often not integrated
- risk discussed, kinda sorta, but not really allocated
- target returns harder than they look, and rarely supported by a real plan
- decisions get made, often slowly, but too rarely connected
Individually, none of this is fatal. Together, it adds up, quietly, into a big problem.
Anyone associated with any of these pools of capital will tell you how truly important they are. Fewer seem willing to ring the alarm bell or talk about the hard bits.
Most foundation boards are missing a few of these pieces. They’re not alone. You can have a well-run board, family office, or advisor and still not have this fully covered. In many cases, it’s not a lack of effort or intelligence. It’s that the full set of skills needed to oversee today’s more important, more complex portfolios isn’t always sitting around the table at the same time.
Governance is there. Experience might be there. But connecting how the portfolio actually works - across fixed income, private markets, liquidity, risk, tactical decisions, and long-term objectives - doesn’t always have a clear owner. At least not one sitting there every time decisions are made.
So the pieces are all there, and the good intentions are almost always there, but it’s too often disconnected. Some portfolios need a full reset. Many just aren’t that far away - from asking the questions out loud and having them answered in the same room.
