What impact investing can learn from Vanguard’s 7x Growth

The Ford Foundation’s recent announcement of its plan to invest up to $1 Billion of its endowment into impact investments is yet another chance to ask if, or when, impact investing will become mainstream.

And by “mainstream” I mean normal.

One idea that’s been on my mind: rather than search for answers deep in the heart and soul of impact investing, we should look at the history of index funds.

The foundational academic article about indexing as an investment strategy was written 50 years ago, in a piece penned in 1966 by William Sharpe in The Journal of Business. Sharpe’s conclusion, among others, was that “The results tend to support the cynics: good performance is associated with low expense ratio.” Not shocking, but this was the opposite of the core logic of the mutual fund industry, one which justified high expenses by supposedly even higher performance.

Nine years after Sharpe’s article, in 1975, John Bogle founded the Vanguard Group, and in 1976 he launched Vanguard 500 (VFINX).  VFINX was and is a low-cost fund that mirrors the S&P 500. Investors in the fund are“buying” the entire S&P for a very low cost. The theory was simple: you won’t beat the S&P in the long run, so the smart thing to do is to get the S&P’s returns with as low an expense ratio as possible.

This one fund was a bet that, over time, investors would come to understand that consistently beating the market with an active stock-picking strategy is hard, and that beating the market by enough to make up for the cost of active management is nearly impossible.

(For some simple math to support this conclusion, think of it this way: historic equity returns are about 7% a year, and most mutual funds charge around 1.5% in fees (if not more). This means you’re eating up more than 20% of your return every year with the fees paid to an active manager. The assets that manager invests in needs to beat the market by more than 20% every year, forever, just to match the performance of an indexed fund. It turns out that this is very hard to do. A 1991 article by Sharpe drilled the point home: “To repeat: Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.” Now, this would be obvious if fund fees were sold as “20% of total expected return” instead of “1.5% of invested capital.” But I digress.)

Despite the analytical support of academics like Sharpe and others, Bogle and the Vanguard Group were often mocked, and even called un-American, for their tortoise-like strategy of mirroring the broader market instead of trying to beat it, all while charging investors spectacularly low fees. This strategy cut deeply against the story, heavily marketed by the big banks, that mutual fund managers added value to their clients, value that was more than offset by the fees they charged. The mutual fund industry exists to do many things, and one of those things to preserve itself. There was a lot to be lost with the growth of indexing, not only huge profits but also the very American story that it’s better to bet on the chance of winning than it is to be certain not to lose. These two reasons – marketing power and unchecked investor naiveté – are why it took so long for the facts to prevail.

And yet, despite institutional and cultural resistance, time is a powerful tool. Indexing has grown, ever so slowly, as a proportion of the market over the last four decades, reaching 20% of U.S. equity mutual fund assets in 2014. More interesting still, in the last three years, Vanguard’s assets under management have grown faster than the rest of the mutual fund industry combined. That’s right, according to a recent New York Times article, in the last three years, the entire mutual fund industry, more than 4,000 firms, took in $97 billion, and Vanguard took in $823 billion. Vanguard now manages $4.2 trillion in mutual fund assets, having quadrupled its assets under management in the last 7 years.

If this is analogous to what it will take to “mainstream” impact investing, then we have a few lessons to take away.

First, this is a long road we are walking. So let’s be prepared for a marathon, not a sprint. This means it’s time to stop, as we enter the end of our first decade, pretending that the tipping point is just around the corner.

Second, better data and facts, even for something as easily analyzed as public mutual fund returns, are hard to come by, easy to dispute, and alone they are not enough to tip the scales.

Third, economic incentives are powerfully aligned for the gatekeepers to keep things the way they are. Despite this, things can shift massively if clients speak loudly and uniformly.

Fourth, even a robust story that shouted “this is a better way to make money!” took 50 years to penetrate the prevailing wisdom. We’re twisting ourselves into knots to publish a handful of reports saying there aren’t financial trade-offs between impact investing and other approaches. It’s great to know that is possible. But data alone doesn’t tip the scales, what’s needed is a shift in mindset and a better story. And “we can make as much money as you” strikes me, in the face of the history of indexing, as weak sauce.

Finally, a request. I wasn’t able to uncover a proper analysis of the key milestones in the growth of indexing, but I’d love to find one. For anyone interested in growing the share of investment capital that takes social returns, stakeholders, the long-term view, the environment…anything beyond traditional thinking into account, I suspect that the rocky history of indexing holds more than a few clues about the pitfalls we can avoid and, hopefully, provides a map for shortening our 50-year journey just a bit. The world needs us to move faster than that.

The Third Plate and the Future of Impact Investing

Our food system is broken. While we have solved the problem of how to produce lots of calories for a low direct cost, this same food system has resulted in an obesity epidemic; it is why nearly 10% of the U.S. population has Type 2 diabetes; and, most recently, it likely is playing a role in the huge spike in colon cancer for people in their 30s and 40s.

What do we do about it?

I recently read Dan Barber’s The Third Plate. Dan is a famous chef, the co-owner of the acclaimed restaurants Blue Hill and Blue Hill at Stone Barns. The book’s title is Dan’s answer to the question, “what will the typical American dinner plate look like in 35 years?”

In response, Dan sketched three plates to show the evolution he imagines: the first plate, from the 1960s, had a large, corn-fed steak with a small side of industrial farmed vegetables; the second, from today, had a farm-to-table organic grass-fed steak with a side of organic heirloom carrots; and the third, futuristic plate, had a “steak” made of carrots garnished with a sauce made from leftover beef trimmings.

Dan’s point, with this third plate, is that the current high-end, farm-to-table, farmers’ market approach to food is a luxurious niche that doesn’t address the core issues of the food system: while the foods themselves may be natural and healthy, they are, in Dan’s words, “often ecologically demanding and expensive to grow,” and, by definition, they work at the edges of the system as a whole.

(Cue: impact investing theme music)

The Third Plate is Dan’s exploration of a better solution, a deep dive into whether the carrot-made steak really was the future of food, and what it would take to get there. The book recounts his exploration of Soil, Land, Sea and Seed – the book’s four sections – and what the future of each of these food categories might be.

Like all good narratives, this one is told through people. Each of the book’s many protagonists – whether Klaas Martens, a farmer in upstate New York, Miguel Medialdea, a Spanish biologist, Steve Jones, a seed breeder at Washington State University, or many others – are all rebels of sorts who reach the unavoidable conclusion that whether you’re growing a stalk of wheat, raising an acorn-fed pig, or cultivating the world’s most delicious fish, the only way to produce truly outstanding food is to create food that is in harmony with a broader food system.

Take Miguel Medialdea, the Spanish biologist who raises a bass so delicious that the first one Dan Barber tastes, which, unfortunately, was overcooked, is described thus:

The fish was incredible. Even overcooked and tough – even D.O.A. (“dead on arrival”), as line cooks like to say when a fillet has seen too much heat – it made my mouth water. It was so richly flavored, you’d be forgiven for comparing it to a slowly cooked shoulder of lamb or a braised beef short rib. I’d never known bass could be so delicious.

How does Miguel Medialdea’s Venta de la Palma produce such a bass? It’s a complex system of interplay between salt and fresh water, an 80,000 acre fish farm which feels like a loosely managed system in which Miguel has set up the major pieces, nudges things here and there, and then lets the system do most of the work.

I won’t attempt to describe all of the inner workings of Venta de la Palma – Dan does it better. But I was struck by a moment in Dan’s conversation with Miguel at the end of another meal, in which Dan tries to uncover the secret of what could make a bass so delicious. Was it the scale of the property, which meant no overcrowding and, therefore, almost no disease or parasites? Was it the intricate canal system, which provides a natural filtration system against pollution?

To try to make sense of it all, Dan casually asks Miguel how long it takes for one of his bass to mature.

‘Thirty months,’ Miguel muttered, seemingly to no one in particular.

‘Thirty months!’ I said. ‘It takes two and a half years to raise…a bass?’

‘Yes, that’s the average, which is more than twice the aquaculture average.’

I asked how the company could make money.

‘So far there’s profit, enough to keep us working at an optimum, not a maximum.’

This was the kind of answer Miguel, and Klaas, and Steve Jones kept on giving: that one of the fundamental constraints that had to shift in order to operate a healthy food system is a move from maximum profit to optimum profit. They propose that the only way to create the world’s best food is by creating and maintain a system in balance, and each one of them concludes that such a system is not one that is optimized for extracting every last bit of value that they, personally, can squeeze out of it.

To illustrate the point, at another juncture in this conversation, Dan is shocked by the 30,000-strong flamingo population on the farm. Since these flamingos eat 20% of the farm’s fish and fish eggs, wasn’t their presence a bad thing?

Miguel shook his head slowly, with the same calm acceptance shown in the face of losing half of his goose eggs to hawks.

“‘We’re farming extensively, not intensively,’ he said. ‘This is the ecological network. The flamingos eat the shrimp, the shrimp eat the phytoplankton. So the pinker the bellies, the better the system.’ The quality of the relationships matters more than the quantity of the catch.”

If Miguel’s job is to optimize the overall health of the system, then key indicators of success are the data, like the pinkness of flamingos’ bellies, that tell you about systemic health. Profit may result from this system, but the system is not engineered primarily to create profit.

What a fantastical notion, that profit might be a result and not the goal.

The parallels to our economic system are, I hope, obvious. When I compare the dialogue within impact investing with the conversations happening in the food system, I’m struck by how much we, in impact investing, have so far failed to have a rich, nuanced conversation about where profits fit in the new system we say we aim to create. In my experience, all conversations about profits – or returns – in impact investing quickly devolve into discussion of the financial return a given investment or strategy produces, with both sides losing when they debate the “right” level of return without a broader conversation about whether this return is a result of or the ultimate purpose of the investment.

The much deeper conversation we need to have is around whether to be a successful impact investor, or to be a successful player in an ecosystem funded by impact investments, one needs to have the willingness and the capacity to optimize for the health of the system, and not just one of its outputs (profits, or returns). Meet any of the colorful characters in Dan’s book and you come across rebellious tinkerers who bristle at the status quo at every turn, because they’ve learned, through a life’s worth of experience, that the traditional food system is broken.

Do we have a similarly clear point of view about whether the mainstream capitalist system works or is broken? Do we believe, as we watch everyone from Bain Capital to TPG to the Ford Foundation commit billions of dollars to impact investing, that we can create the kind of deep change we know the world needs if we are unwilling to confront this question head on? Are social entrepreneurs and impact investors the equivalent of food revolutionaries who see that we have no choice but to upend the whole system, or are we hangers-on to the edges of mainstream capitalism, excited to build out our small terrariums without ever questioning the bigger ecosystem?

My belief is that our breakthroughs will only come once we start saying out loud that our ultimate goal is to build a global economic system that is extensive, not intensive. And then, once we recognize that such systems can be built, to ask ourselves what it would take to move that from niche to mainstream.

My belief is that to get from here to there, we need more folks who are willing to think like Miguel. These are people who can deconstruct and reconstruct a food system (or any other system) and, in so doing, can reprioritize the factors they’ve been told to optimize. These are people who are willing to walk the long, hard, stupid road from nowhere to somewhere. These are people who won’t stop tinkering and experimenting and learning and failing and doing it all over again…until, one day, they can consistently produce an output that is better than anything that’s come before it and that enriches the health of all the players in that system.

It’s OK for us to acknowledge that we don’t yet know the right indicators of systemic health, as long as we say that we’re willing to put ourselves on the line to create them.

We start by asking: what is our equivalent of the pinkness of flamingo bellies?

Your voice

Yes, your job is to learn from the masters.

This means that, to start to tell better stories, you’re well-advised to study the storytelling techniques of great storytellers – whether Martin Luther King, or Ken Robinson, or Hans Rosling, or Bryan Stevenson.

And, to make sense of all of that, you’ll want to unpack how to give a great TED talk by learning from speaker coach Nancy Duarte or from TED Curator Chris Anderson (special for blog readers: use the REFERAFRIEND discount code to save 80% on Chris’ course).

You may even take things a step further when you realize that it’s not just storytelling that interests you, it’s really about creating a broader framing of an authentic narrative, in which case you’ll bridge to the work of Marshall Ganz and unpack the story of self, the story of us, and the story of now.

Or perhaps you are more of a writer than a speaker, in which case you’ll want to start with Anne Lamott’s Bird by Bird, and Stephen King’s On Writing, and Ann Patchett’s The Getaway Car, and grow from there.

(And no matter what you do, you’ll want to get your hands on Austin Kleon’s Steal Like an Artist)

But at the end of the day, technique will only take you so far.

At the end of the day, what the world needs from you is not a dim reflection of one of your mentors, not the echoes of someone who inspires you, not the loose parroting of someone else’s words, approach or demeanor.

What the world needs from you is your voice, your truth (here, now, at this moment), your honest language.

Because what we crave most of all are glimpses of humanity. What we long for are glimmers of the unique perspective that only you bring because of the combination of experiences and attitude and character that come together in you, right now, on a stage or in the written word.

To begin this exploration, ask:

Who are you when you are speaking to a close friend?

How do you sound when you give advice from the heart to your child after an argument with her best friend?

How do you show up when an old colleague asks for advice?

How do people say they experience you when you are at your best?

This real, true, honest you – the one who is brave or humble or funny or grounded or clever or bold or quirky – that’s the you we want to see most of all.

A place to practice

The only way to improve performance is through a consistent practice of self-diagnosis, reassessment, and behavior change.

The prerequisites are the belief that we have the capacity to change and grow, and the realization that we have not yet reached our full potential.

This work is sustained by trusted allies who are willing and able to give us astute feedback.

It is steeled by our willingness to hear these allies’ truths, even when they feel like criticism.

And, as we hear these truths, and as we see ourselves and our behaviors more clearly, we must, ever so slowly, start acting differently.

But where to act differently? How to act differently? How does this process actually work?

Part of the answer is within the intentional groups we are part of, ones in which we commit to supporting one another’s growth as leaders. For example, both the Acumen Fellows programs and +Acumen courses are run in groups. We have found, like many before us, the tremendous power of cohorts who embark on a shared journey. A skillful facilitator coupled with a group that is willing to invest in a process of group formation can create a holding environment that can be transformative.

The more obvious tools in this process are the bonds of friendship and trust built in these cohorts. Sometimes these groups also evolve into places where open and honest feedback becomes the norm. Most useful, but often hardest to achieve, is for members to use a cohort as a testing ground for new leadership behaviors.

Cohort groups (or, indeed, any group doing intentional work together) are fertile ground for thoughtful, deliberate experimentation of new behaviors. If trust exists, if recrimination is unlikely, and if you’re willing to be a bit brave, you can (like at summer camp) show up in a new way in any of these cohort groups.

What does this look like? It’s as simple as this: if you’re someone more comfortable jumping to solutions, you can choose to spend your time with the group listening more deeply. If you’re averse to conflict you make the choice to step into the fray. If you like to raise your hands first you can see what happens when you give more space to others. If you’re someone who’s afraid to offend you can work on freely speaking your mind. You start as simply as this, and build from there.

It can help to think of the group as a practice ground, a place to break a new leadership behavior into its component parts and try it on for size. Just as a swimmer would never adjust her stroke at an Olympic qualifying meet, and a tennis player wouldn’t mess with the toss on his serve in the first round of a major tournament, we cannot expect ourselves to be suddenly bolder and more truthful when our salary, or our job, is on the line. Nor should we try to have our first courageous conversation when our bosses’ boss in in from abroad for one day.

Instead, we can jerkily try new leadership moves on for size in our cohort group, putting aside our natural desire for approval, or status, or recognition, or safety in service of learning behaviors we ultimately want to utilize successfully with our teams, our Boards, our business partners, or our bosses.

This is not easy to do. We tend to walk the deep trenches carved by the patterns of our own behaviors, hemming ourselves in with the expectations we’ve created in ourselves and in others about how we are going to act.

The peer groups we are already part of, or that we choose to create, are the best place to start breaking out of these old ruts

I have nothing to say

Most of the time, most ideas worth writing about don’t show up fully formed at the precise moment we stare at a blank sheet of paper.

Indeed, if we expect all of our useful, original ideas to show up only after we settle into the chair, we are setting ourselves up for a lot of frustration.

The ideas come at other moments.  Our job is to remain curious and attentive, so that we stop for long enough to notice our glimpses of passionate insight, of outraged exasperation or of simple, concise observation.

When these moments occur, we must hold on to them for long enough to write down the feelings we have, the core of the insight, and a few scratches about how the argument will flow.

Once that’s done, the writing boils down to the relatively simpler act of putting words around the thoughts so others can see them too.

Kart #7

This past weekend I was the chaperone for my son and 24 of his friends for a go kart racing birthday party. The boys raced in groups of eight for the first hour or so, and then a few of them started to drop out or take breaks, so I raised my hand to jump in to one of the groups.

After I finished my race, an old friend who was on sidelines laughed as he chided me, “Wow, you really crushed those 13 year olds!”

It’s true, my competitive instincts had mingled with the smell of gasoline and the purring of the kart’s 25hp engine, and I’d driven to win. And win I did.

As I was bantering with my son and his buddies about my old man driving skills, a few of them quipped that Kart #7, which I had raced, was “much faster than all the other karts.”

(That may be, I thought, but that doesn’t explain why I kept lapping them. I’m just a much more experienced and better driver).

Near the end of the party, the last race rolled around and there was one empty kart left. By that point, my son, the birthday boy, had switched to Kart #7. As I buckled myself into another kart, I smiled at him jokingly and said, “Now you’ll see that it’s all about my driving skills!”

It’s true, I did win race #2. By a little bit. In the first race I’d finished nearly two laps to each one of theirs, while in the second race I might have passed everyone once.

But if you’d asked me after Race 1, I would have said that most of my success was due of my driving skill, and that Kart #7 might be a tiny bit faster. What I learned after Race #2 was that most of the difference was because Kart #7 was a lot faster, and I’m a tiny bit of a better driver than a bunch of 13 year olds.

I can’t help but wonder the extent to which many of the differences in the ways we see the world result from misattribution of the credit we deserve for our own successes. It’s nearly impossible not to overestimate the roles our intelligence, hard work and skill play in the results we achieve: a success happens, we were smart and tough and hard-working…so it must be that the primary cause of that success were our smarts, our toughness and our hard work.

The truth is that the veil of our own privilege is one of the the hardest veils to remove. Privilege is not something we can see all at once, and sometimes I wonder if we ever have enough perspective to see it fully.

Harder still, once we spot it, is to figure out what to do with it: the world neither needs us to apologize for all that we have been given nor to pretend that it doesn’t exist. Rather our job is to see ourselves – and others – as fully as we can, and then to use all our abilities and good luck and the gifts we have been given to make manifest the better, more just world in which we so deeply believe.

That’s me

The first time it happened, I was 25 years old and working in Spain on a consulting project for a big Portuguese telecom company.

I was on a small project team responsible for a pile of data analysis that would drive the main project recommendations, and we were nearing a final deadline. The analysis, it turned out, was way over my head. And yet, as I looked around the team and our small office for someone to tell me how to go about it, I had this sinking feeling that the person who knew best what to do was me.

It was terrifying.

Partially the fear came from objectively not knowing enough. I had neither the analytical chops to know how to proceed nor the network of relationships to quickly find someone who could help in time. And I was sure that our firm was getting paid far too much to make recommendations based on what I knew.

So while that moment, stemming from poor planning and preparation, is something to avoid, getting to have that feeling was priceless.

I still remember the quiet, mortifying stillness of, “It’s up to me.”

What an important feeling to be able to identify, because once you’ve felt it you can’t unfeel it, and then you can notice that feeling and notice how much easier it is to kick a decision somewhere – up, down, sideways – to gather more information or maybe to put off deciding entirely.

We kick this habit like any other, with both discipline and nuance.

If you want to learn to swim better, or hit a ball better, or do a yoga pose better, you start with the big muscle groups and body angles and work your way towards subtler adjustments. Just so in the workplace: you begin by making calls in the big, obvious moments where you’ve got no choice but to decide; and you work your way through to smaller moments of stalling, hesitation, and the magical sleight of hand we all engage in to open up “outs” in case things turn out wrong.

It is so much easier to avoid responsibility and future blame.  And it is so much more important to practice putting ourselves on the hook, to practice being the kind of person who makes calls, to practice stepping in to uncertainty.

Step up. Decide. Then make it great.

The person we’re waiting for? That’s you.