Confronting Complexity: A Design Guide for System-Level Investors

For most investors, the function of investing is to offset future liabilities, such as retirement. Yet, most investors define success as “beating a benchmark,” rather than funding the future. That misalignment, and the limited design decisions associated with it, stems from Modern Portfolio Theory (MPT), which treats the general price level of the market as exogenous. Recently, the assumption that you cannot impact beta has been challenged by system-level investing. By reducing risk to the environmental, social, and financial systems on which the capital markets rely, system-level investors attempt to improve the overall risk/return profile of the capital markets, which determines 75–94 percent of the variability of your return. But if traditional, MPT-driven investment follows well-trodden paths, system-level investing is bushwacking through a dynamic real-world landscape. To facilitate that, we propose a set of design principles: Consensus, Relevance, Effectiveness, and Magnitude, to ensure investors focus on material systemic risks; Adaptability, Clarity, Connectivity, and Directionality, to help create healthy real-world systems. To achieve those goals, we provide a three-part taxonomy of tools: Investment Enhancement, Field Building, and Opportunity Generation. These design rules help investors cut through the complexity of system-level investing to improve the total risk/return profile rather than trying to beat a benchmark.