Stop Calling the Pandemic a ‘Black Swan’

Managers can’t be faulted for not foreseeing the virus.
They can be faulted for not considering the possibility.

The pandemic is revealing many deficiencies of the status quo. Let me point out one weakness — and offer a remedy. 

Writing about asset allocators and the pandemic, my fellow Institutional Investor columnist Ted Seides recently recommended that:

“CIOs must gather a flood of information from their managers to process what’s happening, calculate performance, and assess risk. They [should] read voraciously and call select managers and strategists to get a sense of what problems may lie ahead and what opportunities may present in their portfolios.”

Ted’s right. Asset allocators need plenty of information to understand and prudently respond to the pandemic. 

But he’s wrong to identify only managers and strategists as allocators’ key sources. 

The advice and decisions of this cohort before the pandemic and its performance during it reveal that many managers — including some of the best resourced among them — failed to include a pandemic in their investment calculus. Fewer still failed to accurately estimate its likely social and economic consequences.

This pandemic is no black swan. 

Experts have talked about the possibility of a pandemic caused by an infectious zoonotic disease for decades. 

Joshua Lederberg, winner of the 1958 Nobel Prize for Medicine or Physiology, repeatedly warned that “the single biggest threat to man’s continued dominance on the planet is the virus.” 

Numerous scientific reports confirmed this view, and the recent outbreaks of SARS (2003), MERS (2012), and Ebola (reemerging most recently in 2013) provided stark historical predicates.

And if we need one more example of the grey-swan nature of this pandemic, consider that as recently as March 2019, scientists at the Wuhan Institute of Virology — yes, that institute — issued this unambiguous notice: “It is highly likely that future SARS- or MERS-like coronavirus outbreaks will originate from bats, and there is an increased probability that this will occur in China.”

Even after news of the swan had appeared, managers and strategists seemed to be caught flat-footed. For example, in mid-January (and, of course, at Davos), CNBC reported that David Tepper was saying that investors have to be in the market; Ray Dalio himself declared that “cash is trash.” 

To be clear, I am not saying that asset managers and strategists should have known that this novel coronavirus would develop in Wuhan in late 2019 and that it would produce a specific set of global, multidimensional consequences.

I am saying that they could have at least known that this type of pandemic was a high-probability, high-impact event and included the phenomenon in their risk assessments and investment processes long before this pandemic erupted. 

Furthermore, information on the outbreak in Wuhan was widely available, and so were mathematical epidemiological models that have been successfully used for decades to track and predict epidemics as well as explicit public health frameworks for effectively responding to a pandemic. 

It was also well known that in spite of warnings of a possible pandemic and the availability of models and response frameworks, “the simple truth is that neither the world as a whole nor the U.S. in particular is at all prepared to handle a major infectious-disease pandemic.” This quote comes not from some arcane scholarly source, but from a 2017 Time cover story, “The World Is Not Ready for the Next Pandemic.”

So it would seem reasonable to expect that once the virus was identified as a novel coronavirus, managers and strategists — whose success is tied to gaining an informational edge — would understand the gravity of the situation. 

My intention is not to blame managers and strategists for their omission; history and asset outflows will write that story.

Instead, my goal is to goad allocators to expand their intellectual universe to include professionals who have committed their entire careers to providing critically reviewed research on scientific topics.

In our current state, I’m thinking of such people as (and I apologize for my home country bias):

Dr. Omai Garner, associate clinical professor and director of clinical microbiology in the UCLA Health System;

Dr. Marc Lipsitch, professor of epidemiology and director of the Center for Communicable Disease Dynamics at Harvard University;

Angela Rasmussen, associate research scientist at Columbia University’s Center for Infection and Immunity;

Paul Romer, Nobel Prize–winning economist at New York University;

Dr. Pardis Sabeti, professor at the Center for Systems Biology and Department of Organismic and Evolutionary Biology at Harvard University and at the Department of Immunology and Infectious Disease at the Harvard School of Public Health.

These experts and their peers produce research that is scholarly, easily accessible, understandable, and often available via podcastsYouTube videos, webcastsop-eds, and the TV evening news. 

Additionally, some allocators should take advantage of their unique access to world-class talent. For example, university endowments could tap directly into their faculty, administration, students, and alumni. 

Jim Dunn, CEO and CIO of Verger Capital Management, has been doing just this (in the spirit of full disclosure, Verger is an investor in our firm, Rosetta Analytics). 

Verger is an OCIO that came out of the Wake Forest University endowment office. Through Verger’s relationship with the university, Dunn and his team have participated in calls and webinars with infectious disease and public health experts within the school’s network. He credits these and conversations on related topics with providing the team valuable insights that influenced its investment decisions. 

It’s critical that allocators do expand their networks now because, according to public health experts, states are reopening before any have met all the criteria needed to start doing so, making second and third waves of Covid-19 likely. As one expert recently told CNN, “The idea that this [pandemic] is going to be done soon defies microbiology.” 

So ask yourself before you sign up for that webinar on ESG investing in the time of Covid-19 or read another “Daily Observations”: Would your time be better spent listening to Nature’s “Coronapod” or reading the new issue of Morbidity and Mortality Weekly

In other words: Don’t just sit there, do something.

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