This article argues that institutional investors can achieve long-term success by adopting an 'infinite game' mindset, a strategic shift that redefines winning beyond traditional metrics.
Reading time: 6 minutes.
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“There are at least two kinds of games. One could be called finite and the other infinite. A finite game is played for the purpose of winning, and infinite game for the purpose of continuing the play.”
So opens James P. Carse’s slim volume of playful yet deep philosophical doublets.
The idea of finite and infinite games opens a fascinating lens to view investing. He suggests the real mastery in games, like investing, isn't just about winning but continuing to play.
At Fuse, we’ve wondered how the 'infinite game' mindset might redefine success in institutional investing.
Joy and I sat down for a spirited discussion about how the “infinite game” mindset changes the unwritten rules of institutional investing. We discuss why:
The definition of winning has evolved for institutional investors
New rules require new tools to understand portfolio exposure
Institutional investor’s long-term success matters to everyone
Let’s get into it!
JvJ: Debate Team Tryouts
Jordan: Investing is often couched in the language or sports and war. It’s about sharpening your edge, crushing the competition and yes, playing to win (PTW). However, pensions exist to meet their liabilities in perpetuity. Winning seems like a strange goal in this context.
Joy, you've helped many organizations develop strategy capabilities using the time-tested Playing to Win framework. Is “winning” still a relevant goal for institutional investors?
Joy: I can’t believe I let you talk me into a debate, Dr. Jordan.
Jordan: I’m not a doctor (yet), I just play one on the internet. Don’t look to me if there’s a medical emergency on an airplane.
Joy: You did it to yourself!
I actually quite like the idea of winning in the pension and investment management industry.
While it’s a concept that comes easily to asset managers (who are managing money for fees), it's less comfortable for asset owners (who are managing money for return). But it’s not enough just to exist, within the safety of our monopolistic mandates – it is important to win.
And what does winning mean? I love Roger Martin’s elegant description of strategy as a “theory of advantage” – winning means adding more value to my stakeholders than the alternatives, ideally in perpetuity. Even in the context of social organizations or other two-sided markets, “doing something for the subsidy side that is of value far in excess of the cost paid by the money side.”
For DB pensions, this means delivering value – retirement security – that is greater than the sum of employer and employee savings. Which we would argue is increasingly about more than just paying the pension cheque! We can debate that one another time.
For institutional investors, winning still means earning a return on assets but also doing so in an increasingly complex and uncertain context where the rules of the game are in flux.
Jordan: Good point. But you’re not off the hook. Because by that definition, to win, institutions need to create at least as much value as they extract. You need some accounting of the balance.
How, then, should investors think about the underlying systems that make winning possible, and their contribution to them?
I’m talking about trust in public markets, global economic and ecological and institutional health etc. This goes beyond ESG. These are material drivers of your ability to generate future returns.
Joy: I would like institutional investors, particularly the Canadian pensions, to think of themselves as makers, not takers, in these systems.
It's not just about playing by the market's rules but also about shaping those rules to foster trust, sustainability, and resilience. This means reimagining investment processes to incorporate new kinds of risks and opportunities, from climate change to social dynamics.
It’s a funny thing – traditionally, investors think of themselves as playing by the markets’ rules, naturally competing against other investors in a game that is already defined. Slowly but surely the significant impacts of non-financial systems and trends – climate change, as the most obvious example – have necessitated their inclusion in the investment decision making process. I refer to it as new information through old pipes!
We’ve got excellent risk frameworks and investment processes, but they feel increasingly under strain trying to absorb the complexities of these underlying systems, translating and anticipating their financial effects.
It's a real mind-shift for investors to go from following a process to reimagining that process around an entirely new set of inputs and outcomes. From following the rules, to thinking about how the rules should change. Some of our clients are doing it, and it’s exciting!
And Canadians have done it before – the Maple model innovation allowed for insourced, active, multi-asset class investing that was previously unprecedented in public institutions. So, I’m confident we can look at problems like energy transition and public trust and ask, what investments might we make that build the markets or the context we want to play in?
Jordan: True. The Canadian plans changed the rules of the game for everyone else. Winning in the municipal bond market in 1964 is different than winning in renewables in 2024.
Winning meant continuing to play whatever game was needed to ensure your continued existence. As a result, these plans have wide ranging mandates and investment capabilities.
Joy: Sounds like we’re playing an infinite game!
It gets harder to declare victory and becomes a truly long-term effort. But I’ll turn it back to you with a paradox: When you can invest anywhere, how do you know where to invest?
Jordan: Ha, great question. It’s not enough to know where to invest either. I’d argue it’s more important than ever to know “what” you are truly investing, and invested in. And I’m not talking about the asset classes, sectors or regions.
Asset classes might be the convenient way to organize and vibe with the external market. However, you need to understand what you “get” when you invest in something.
Here’s a simple back of the napkin example: an office in Calgary, a pipeline in Spain, and an energy stock in Australia. Three totally different assets, held in different sections of the book, yet all with the same underlying exposure – oil and gas.
Your portfolio exposure then is a function of your goals as a fund, i.e. you need to understand what game you are playing.
It comes down to your ability to understand where risk and return will come from across your assets and asset classes. The deep drivers underneath the traditional macro factors.
To do this, investors need distilled views of what they own, and the handful of common drivers that impact the whole portfolio. It doesn’t have to be – and shouldn’t be – complicated.
When you know what you are invested in – which, as a universal investor, is usually ultimately GDP – you then realize that you’re invested in the continuation of the game itself. You have become an infinite investor.
Joy: And operating this way requires a different toolkit. Strategy as a problem-solving exercise, rather than an every-x-year cycle; data, processes and incentives that facilitate new levels of collaboration; and, yes maybe even mandates that contemplate a more generative role in the systems upon which successful investing outcomes depend.
Jordan: More than “just” a toolkit, then. A new way of looking at the world. New “pipes” for new information, to use your Super Mario metaphor.
This matters.
Institutional investors are part of the social and economic fabric of society. Through the pensions they pay, and the investments they make, the stakes are high. There is little room to be wrong here.
That’s why we’re so passionate about helping institutions get this right. By understanding the connection correlations between in your portfolio, and to the external world, we believe institutions can better hedge against existential risks and find new opportunities for value creation.
Even better though, is that we’ve figured how to work with the already-efficient investment and risk processes in place.
We do this by combining investing rigor with design logic in what we call Capital Design.
It helps institutions embrace their role as transformational players in an infinite game. As much as new rules require new tools, new tools can also help shape new rules.
Joy: Is this like the institutional version of indie music, where I’m cool now because I had the Capital Design t-shirt before it was famous?
Jordan: Joy, you are in the top 8 coolest people at Fuse, I’ll give you that.
However, “A finite player consumes time; an infinite player generates time.” Given we are stuck in the finite construct of our readers’ attention span, we will save the details of Capital Design for our next post. In the meantime, reader questions are always welcome at hi@fusestrategy.co.
To recap: institutional investors can achieve long-term success by adopting an 'infinite game' mindset, a strategic shift that redefines winning beyond traditional metrics. Doing so is imperative – we are all invested in our institutions long-term success.