The Courage to Not Invest

Fresh from the hedge fund world, a certain public fund CIO had a bone to pick with his new peers.

“I’ll be at conferences where people say they don’t think about price or where we are in the cycle—they just buy, buy, buy,” he complained. “That. Drives. Me. Crazy.”

He ought to meet David Neal. 

In the spring of 2007, the Australian government gave Neal a liquid A$39 billion (US$29 billion) and the mandate to buy, buy, buy. He’d been hired as inaugural CIO of the Future Fund, an upstart sovereign wealth fund in Melbourne. “The pressure was on to get it invested,” Neal, now CEO, recalled in a 2013 interview with CIO. “There was concern about valuation levels, but also the sense that there wasn’t a mandate to hold 100% cash.”

Institutions rarely pull off killer market timing—selling a big stake at the crest, dropping fossil fuels days before BP’s spill, etc.—because it’s not their job. But now and again, we see a perfect trade. Most are phenomenal luck. This is a story of a little luck, and a whole lot of courage.

Neal hired Australia’s notorious bear Tony Day as head strategist in September 2007 (here’s the luck part). The fund’s twice-weekly big stock buys ended shortly thereafter. “We began to be not just concerned about market valuation—but also serious, systemic risk issues,” Neal recalled. “We discussed it, and Tony was prepared to make a very bold recommendation.”

They went to the board. “‘You need to stop. You need to stop investing. We need to halt this ramp-up,’” Neal told his bosses. The board trusted these brand-new hires, and froze progress towards the fund’s 55% to 60% equities target. The Future Fund reported a 41% cash allocation on June 30, 2009, and closed the year with a 4% loss. Neal, Day and Co. outperformed Harvard’s endowment by 2,310 basis points in their second year on the job.

“I look back now, and it’s very easy now to underplay how hard the decision to stop investing was,” Neal said, crediting Day with much of the outcome. But, he was quick to add, “it’s difficult to stand around saying, ‘How good are we? We were right,’ when you still have a negative 5% return. The fact that everybody else is down 15% makes you feel a little bit better—but you still lost 5%. Investing is one of those things where if you’re ever sitting around rubbing your chest saying, ‘We got it dead right,’ you’re probably about to take a bath.”