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How is Picking Investment Managers Like Choosing Charities?

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This article outlines the five similiarities between picking investment managers and charities.

The period between Thanksgiving and the end of the year is often called the “giving season” because a disproportionate amount of charitable giving happens then—about 30% of annual giving occurs in December.1 Unfortunately, only 35% of donors do any research before picking charities, and of those, 75% spend less than two hours doing research.2 Regardless of the reason, charitable giving is an area in which individuals often allocate large sums of money without doing adequate diligence on which organizations are likely to have the greatest impact. In that sense, charitable giving is a lot like picking investment managers. But the similarities don’t end there. Here are five similarities between picking investment managers and picking charities.

1. There are lots of options.

Our research database, as an example, covers over 10,000 investment managers and nearly 23,500 products.3 For charitable giving, there are over 1.5 million nonprofits in the United States.4 The number of choices in both areas is so vast that individuals cannot thoroughly research them all. As a result, donors and investors need efficient ways to narrow the choices.

2. Biggest names aren’t necessarily the best.

In both investment management and charitable giving, organizations get big by being good at asset gathering. A question we typically ask portfolio managers is compensation structure. Is it based purely on performance, or is there an asset gathering component? It would be nice to think that those who gather the most assets do it by providing the best quality product, and that may be the case, but it isn’t necessarily true. Some firms have better resourced marketing departments, and some have partnerships that drive asset growth (e.g., banks or other recordkeepers). In the case of charitable organizations, having a strong brand name or being attached to a named celebrity can attract donations, but that doesn’t make them the best. There may be better organizations—both charities and investment managers—that are run by wonky experts that are extraordinarily good at what they do, but not especially skilled at marketing. Or they could be focused on a niche that is extremely attractive, but hard to explain to an average person.

3. Simplistic evaluations are inadequate.

There are simplistic evaluations in both charitable giving and investments, usually as an easy (but not good) proxy for quality. Investors often focus on a fund’s historical performance (usually for three years, and often before fees), even though past performance has been shown to be a poor predictor of future performance for most public asset classes, and most active managers require longer than three years to fairly assess the results of their process.5 In charitable giving, donors often focus on a similarly irrelevant measure: percentage of the charity’s budget that goes to “overhead.” Weeding out charities with very high overhead is an effective way to avoid bottom-quartile performers, but just because a charity spends little on overhead doesn’t mean that its core operations are particularly good at accomplishing its mission. That is, donors looking to select the very highest impact charities will need a different approach.

4. The best way to evaluate choices is to do deep analysis.

If simplistic, but commonly used, measures are not the best ways to evaluate investment funds or charities, then what is? In both cases, it is thorough analysis. This includes things like:

  • completing onsite visits to meet with the teams
  • researching the evidence behind their strategies and narratives
  • assessing the effectiveness of their execution
  • looking at their track records in different environments to understand past performance
  • developing an understanding for why the future performance may be different from the past

Doing these things well usually takes a lot of time and professional expertise. In fact, the 2019 Nobel Prize in Economics was awarded for to a trio of economists for their approach to assessing the effectiveness of strategies to alleviate global poverty, an approach that has been used extensively to evaluate the programs of many charities.6 7

5. There are expert advisory organizations available to help those who don’t want to do the research themselves.

Institutional investors can work with organizations like Aon, which have built a large infrastructure of professionals to find and review investment opportunities. Donors can also work with experts to help identify the best charities, but one key difference from investing is that many of the best evaluators share their conclusions with the public. Donors can easily access robust research from charity research shops like GiveWell,8 ImpactMatters,9 and the Center for High Impact Philanthropy.10 In addition, donors have access to platforms that aggregate recommendations from multiple research shops; examples include The Life You Can Save11 and Donational.12

Regardless of whether you’re thinking of allocating money to traditional investments or charitable giving, doing thorough research is likely to yield benefits.

These sites contain information that has been created, published, maintained or otherwise posted by institutions or organizations independent of AHIC. AHIC does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness or timeliness of the information located there.

3 As of 12/31/2018. Source: Aon
5 Sebastian, Mike and Sudhakar Attaluri, Conviction in Equity Investing, The Journal of Portfolio Management, Summer 2014, 40 (4) 77-88; DOI:


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