Anurag Pandit is chief investment officer of The American Lebanese Syrian Associated Charities (ALSAC), the fundraising and awareness organization for St. Jude Children's Research Hospital. In this interview, Pandit discusses how his approach to institutional investing has evolved throughout his career; his strategic advice to create a successful portfolio; and his outlook on cryptocurrencies and bitcoin as an asset class.
Prior to joining ALSAC, Pandit accumulated more than 25 years of investment experience at organizations including Boston Children’s Hospital, John Hancock Funds, Loomis Sayles and Bank of Boston. He earned a bachelor’s degree in commerce from Delhi University and a master’s degree in management from the Sloan School at MIT. He holds a Chartered Financial Analyst designation.
Anurag Pandit was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. He graciously spoke with us on December 20, 2017. The following interview has been edited and condensed.
Trusted Insight: How has your approach to institutional investment and risk management evolved throughout your career?
Anurag Pandit: I have been in institutional investing since 1988 in various roles. Early in my career, I gained exposure to banking including foreign exchange trading, money markets, derivatives structuring and corporate finance. Since the early 1990’s, I have primarily been an institutional investor, the last seven as an institutional allocator of capital. I feel fortunate to have been able to bring a broad investment skill-set to serve a world-renowned research hospital that is finding cures and saving lives. Pioneering treatments invented at St. Jude have helped push the overall childhood cancer survival rate from 20 percent to more than 80 percent since it opened more than half a century ago.
During this time, the investment business has changed meaningfully as well. In particular, there has been a proliferation of new products such as exchange-traded funds, including derivatives and risk mitigation products. Yet, for me, the three biggest changes at the most fundamental level are the commoditization of our business, the extension of emerging markets and the emergence and recognition of behavioral finance as a cogent challenge and alternative to modern portfolio theory. I adopt several of my processes and evaluation of markets to accommodate an ever dynamic world.
Commoditization of Information
The most significant development has been the commoditization of information. The information technology revolution has been critical to this change, but so was the implementation of fair disclosure rules. The ability to add value as a traditional stock-picker has become significantly harder. It takes less time for newer strategies and market opportunities to be emulated. Buyout funds and hedge funds—once considered innovative products—are easily copied, diluting the extraordinary profits for late adopters. Only venture capital appears to have maintained some of its distinctive edges, and that too, among a few elite firms. Further, since those elite few are in extremely high demand with limited capacity, institutional investors only marginally benefit at the total fund level.
Emerging Markets
A second important change could probably be traced to the fall of the Berlin Wall. It wasn’t the wall’s falling but the symbol that capitalism was the better alternative even among non-democratic nations, which led to the rise of China and Russia and other emerging and frontier countries. Emerging market investing has been around for a long time, but the countries that qualified under that definition have become large and potent. Further, there are a number of countries that can enter the fray in the future. The best opportunities may be in finding the right partners in the private markets in emerging and frontier countries.
Behavioral Finance
The third big change, according to me, is a keener understanding of the role of behavioral finance in investing. While bubbles and investor psychology have been known for a while, its mainstream application and deployment have been minimal. The role of behavioral finance in challenging modern portfolio theory and the rational investor is meaningful and evolving. Even though information and analytics have created sophisticated risk models from a quantitative perspective, the evaluation of risks for “known-unknowns” and “unknown-unknowns” may well be shared with behavioral finance in the future. The basic tenets of being fearful of others’ euphoria and bold upon their fears appear to be as relevant today as they did when I first started in the industry.
Trusted Insight: Bitcoin and cryptocurrencies have exploded during the past few months. What are your thoughts on Bitcoin as an asset class?
Anurag Pandit: This is a new and emerging area. The underlying block-chain technology, creating an encrypted unalterable ledger with open-source authentication has merit. Whether Bitcoin should retain value remains to be seen. Cryptocurrencies, broadly, and Bitcoin, in particular, do not appear to meet my three principal criteria of a currency: a) stability of value b) ubiquity and c) trust.
The instability was highlighted in Bitcoin’s observed 13.7X appreciation, followed by a 30 percent depreciation in 2017. Its use is not ubiquitous in normal day-to-day transactions. The mystery surrounding its founder, the predominant trading in foreign markets, particularly frontier markets with poor fiat currencies, as well as use by unregulated market participants, should create doubt. Currencies have traditionally been a store of value not a source of value. To consider it a currency appears to be disingenuous. Having said that, Bitcoin was founded in in 2009, over eight years ago! Most bubbles — including the dot-com, real estate, south-sea company and tulip mania — did not last that long.
This one is best left to the technologists, venture capitalists and enthusiasts. In this high-stakes game of poker, my advice is caveat emptor; let the buyer beware.
Trusted Insight: In a market with high valuations and low expected returns, what would your strategic advice be to other investors to create a successful portfolio?
Anurag Pandit: In today's market, because of the elevated levels of almost all asset classes, there is a compelling reason to invest in diversifying strategies compared to the past. In most times, stocks are the highest returning asset class. Further, in most times, bonds have proven to be one of the best diversifiers for stocks, especially given their respectable past returns. Thus, historically some combination of the two has served as a decent investment model. At the current time, stocks trade at meaningfully elevated multiples and bond yields, owing to quantitative easing, barely cover inflation.
Thus, at the margin, strategies that offset valuation risk are looking more compelling. The danger of this approach is, as John Maynard Keynes said, “the market can stay irrational longer than you can stay solvent.” Given the degree of over-valuation, at the margin, a prudent man should agree with such a diversifying tilt in a portfolio.
Trusted Insight: What advice would you give new investors entering the institutional investment world today?
Anurag Pandit: The number one recommendation I would give to a new institutional investor is to be bold in challenging the status quo. Ask seemingly unsophisticated questions such as “what is the difference between a product and an asset class?” And “What do you mean by risk-on?” You might find the questions and their answers not so naive. Ask many questions with the idea of getting a multi-dimensional view. If an answer does not make sense, press further until you are satisfied.
Since data itself is imprecise, the need to look at it from different angles is important. Asking questions and pushing deeper on an issue will be enlightening and one of the most interesting ways to get to 10,000 hours of expertise. It is easy to implement as all one has to do is listen and challenge. Further, the starting point is not as relevant because the very process of questioning will ultimately lead one to issues that they find most important.
Another important process is one of introspective learning. Maintain a feedback loop of your most important investment thesis and periodically examine the veracity of your assumptions. Over time, one learns not to make loose assumptions and equally importantly, learn from the decisions that are right and wrong, thereby better understanding the type of investor they have become.
Finally, train yourself to stay balanced. Training to be balanced in a world of overloaded distractions and seemingly limitless information can be hard, especially in times of euphoria and despair. Some of my best investment decisions have been made in times of imbalance such as wars, crises and bubbles. I find my balance in sports, yoga, meditation and music. Each one, I suspect, has their own way of coping.
You can view our full catalog of interviews with institutional investors here.
To learn more about health care system investing, click here to view the complete list of Top 30 Health Care System Chief Investment Officers.
Prior to joining ALSAC, Pandit accumulated more than 25 years of investment experience at organizations including Boston Children’s Hospital, John Hancock Funds, Loomis Sayles and Bank of Boston. He earned a bachelor’s degree in commerce from Delhi University and a master’s degree in management from the Sloan School at MIT. He holds a Chartered Financial Analyst designation.
Anurag Pandit was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. He graciously spoke with us on December 20, 2017. The following interview has been edited and condensed.
Trusted Insight: How has your approach to institutional investment and risk management evolved throughout your career?
Anurag Pandit: I have been in institutional investing since 1988 in various roles. Early in my career, I gained exposure to banking including foreign exchange trading, money markets, derivatives structuring and corporate finance. Since the early 1990’s, I have primarily been an institutional investor, the last seven as an institutional allocator of capital. I feel fortunate to have been able to bring a broad investment skill-set to serve a world-renowned research hospital that is finding cures and saving lives. Pioneering treatments invented at St. Jude have helped push the overall childhood cancer survival rate from 20 percent to more than 80 percent since it opened more than half a century ago.
During this time, the investment business has changed meaningfully as well. In particular, there has been a proliferation of new products such as exchange-traded funds, including derivatives and risk mitigation products. Yet, for me, the three biggest changes at the most fundamental level are the commoditization of our business, the extension of emerging markets and the emergence and recognition of behavioral finance as a cogent challenge and alternative to modern portfolio theory. I adopt several of my processes and evaluation of markets to accommodate an ever dynamic world.
"Only venture capital appears to have maintained some of its distinctive edges, and that too, among a few elite firms."
Commoditization of Information
The most significant development has been the commoditization of information. The information technology revolution has been critical to this change, but so was the implementation of fair disclosure rules. The ability to add value as a traditional stock-picker has become significantly harder. It takes less time for newer strategies and market opportunities to be emulated. Buyout funds and hedge funds—once considered innovative products—are easily copied, diluting the extraordinary profits for late adopters. Only venture capital appears to have maintained some of its distinctive edges, and that too, among a few elite firms. Further, since those elite few are in extremely high demand with limited capacity, institutional investors only marginally benefit at the total fund level.
Emerging Markets
A second important change could probably be traced to the fall of the Berlin Wall. It wasn’t the wall’s falling but the symbol that capitalism was the better alternative even among non-democratic nations, which led to the rise of China and Russia and other emerging and frontier countries. Emerging market investing has been around for a long time, but the countries that qualified under that definition have become large and potent. Further, there are a number of countries that can enter the fray in the future. The best opportunities may be in finding the right partners in the private markets in emerging and frontier countries.
Behavioral Finance
The third big change, according to me, is a keener understanding of the role of behavioral finance in investing. While bubbles and investor psychology have been known for a while, its mainstream application and deployment have been minimal. The role of behavioral finance in challenging modern portfolio theory and the rational investor is meaningful and evolving. Even though information and analytics have created sophisticated risk models from a quantitative perspective, the evaluation of risks for “known-unknowns” and “unknown-unknowns” may well be shared with behavioral finance in the future. The basic tenets of being fearful of others’ euphoria and bold upon their fears appear to be as relevant today as they did when I first started in the industry.
Trusted Insight: Bitcoin and cryptocurrencies have exploded during the past few months. What are your thoughts on Bitcoin as an asset class?
Anurag Pandit: This is a new and emerging area. The underlying block-chain technology, creating an encrypted unalterable ledger with open-source authentication has merit. Whether Bitcoin should retain value remains to be seen. Cryptocurrencies, broadly, and Bitcoin, in particular, do not appear to meet my three principal criteria of a currency: a) stability of value b) ubiquity and c) trust.
"This one is best left to the technologists, venture capitalists and enthusiasts. In this high-stakes game of poker, my advice is caveat emptor; let the buyer beware."
The instability was highlighted in Bitcoin’s observed 13.7X appreciation, followed by a 30 percent depreciation in 2017. Its use is not ubiquitous in normal day-to-day transactions. The mystery surrounding its founder, the predominant trading in foreign markets, particularly frontier markets with poor fiat currencies, as well as use by unregulated market participants, should create doubt. Currencies have traditionally been a store of value not a source of value. To consider it a currency appears to be disingenuous. Having said that, Bitcoin was founded in in 2009, over eight years ago! Most bubbles — including the dot-com, real estate, south-sea company and tulip mania — did not last that long.
This one is best left to the technologists, venture capitalists and enthusiasts. In this high-stakes game of poker, my advice is caveat emptor; let the buyer beware.
Trusted Insight: In a market with high valuations and low expected returns, what would your strategic advice be to other investors to create a successful portfolio?
Anurag Pandit: In today's market, because of the elevated levels of almost all asset classes, there is a compelling reason to invest in diversifying strategies compared to the past. In most times, stocks are the highest returning asset class. Further, in most times, bonds have proven to be one of the best diversifiers for stocks, especially given their respectable past returns. Thus, historically some combination of the two has served as a decent investment model. At the current time, stocks trade at meaningfully elevated multiples and bond yields, owing to quantitative easing, barely cover inflation.
Thus, at the margin, strategies that offset valuation risk are looking more compelling. The danger of this approach is, as John Maynard Keynes said, “the market can stay irrational longer than you can stay solvent.” Given the degree of over-valuation, at the margin, a prudent man should agree with such a diversifying tilt in a portfolio.
Trusted Insight: What advice would you give new investors entering the institutional investment world today?
Anurag Pandit: The number one recommendation I would give to a new institutional investor is to be bold in challenging the status quo. Ask seemingly unsophisticated questions such as “what is the difference between a product and an asset class?” And “What do you mean by risk-on?” You might find the questions and their answers not so naive. Ask many questions with the idea of getting a multi-dimensional view. If an answer does not make sense, press further until you are satisfied.
Since data itself is imprecise, the need to look at it from different angles is important. Asking questions and pushing deeper on an issue will be enlightening and one of the most interesting ways to get to 10,000 hours of expertise. It is easy to implement as all one has to do is listen and challenge. Further, the starting point is not as relevant because the very process of questioning will ultimately lead one to issues that they find most important.
"Some of my best investment decisions have been made in times of imbalance such as wars, crises and bubbles. I find my balance in sports, yoga, meditation and music."
Another important process is one of introspective learning. Maintain a feedback loop of your most important investment thesis and periodically examine the veracity of your assumptions. Over time, one learns not to make loose assumptions and equally importantly, learn from the decisions that are right and wrong, thereby better understanding the type of investor they have become.
Finally, train yourself to stay balanced. Training to be balanced in a world of overloaded distractions and seemingly limitless information can be hard, especially in times of euphoria and despair. Some of my best investment decisions have been made in times of imbalance such as wars, crises and bubbles. I find my balance in sports, yoga, meditation and music. Each one, I suspect, has their own way of coping.
You can view our full catalog of interviews with institutional investors here.
To learn more about health care system investing, click here to view the complete list of Top 30 Health Care System Chief Investment Officers.