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Human Portfolio Theory

9th Sep 2015
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My colleague Martin Hall and I were working on a project for an asset management client recently when we developed a new model that we thought worth sharing. It is worth knowing that Martin is a former Bank of England Economist, Fund Manager and Head of Fixed Income for a number of well known fund management firms. I mentioned to him that in the past, when working with investment professionals and leaders I used the analogy of a ‘portfolio’ of people to emphasise the importance of getting people decisions right.

The analogy was that an organisation or team is like a portfolio, and that every person added to that portfolio was and opportunity to improve the portfolio and add value. Equally, if someone was underperforming and left the organisation, the portfolio value would increase. So people selection was a little like stock selection and need some of the same research and due diligence that investment people bought to their investment decisions.

Martin liked the idea and we developed this thinking further and with a little tongue in cheek, we called it Human Portfolio Theory. We realise that some of our thinking bears some similarity to and influenced by Human Capital Management (HCM) but we would like to think we have moved the ball a little further. We have developed our thinking in some detail but a few concepts that we thought were transferable from investment management to people management were:

• Purpose of portfolio. Before you select your investments, what is the purpose of your portfolio and over what time horizons will the portfolio’s performance be judged? Will the portfolio perform better in up markets or down markets?
• Research and risk assessment. You wouldn't invest in a stock or bond on a hunch or gut feel. You would do your research. How can you improve the statistical chances of getting a good decision – maybe psychometrics, rigorous interviews and some high quality referencing?
• Is the portfolio diversified? There is a great economic case for diversity – of stocks and people.
• What adds value or ‘alpha’? Will your people add real economic value that more than covers their costs?
• What is your benchmark? How will your portfolio outperform its industry rivals?
• Is a person a ‘growth’ investment, undervalued but with future potential or a fully developed but safe investment (blue chip professional) who will deliver now and for the foreseeable future?
• Are there people who are ‘special situations’? Maybe something went wrong in a person’s career or life and they have become undervalued by the market?
• How do you invest in your people to make them grow and add value to themselves and the portfolio?
• What is the cost of turnover? A portfolio that turns over quickly drains dealing costs from the fund.
• Is there a strong ‘sell discipline’ around poor performers?

We would like to emphasise that we do not see people as ‘inanimate’ stocks but we do see them as an investment. As such, we would fully support talent initiatives that help develop that investment and helps increase the value of the people and their contribution to the firm’s economic value. As coaches who spend much time exploring motivation and the psychology of behaviour we do not see this model as all encompassing, like HCM it misses aspects of what it means to be human, it is more head than heart – so like all models it is a simplification of reality.

This blog has only touched on a few of the parallels between the worlds of investment management and people management but we think it is an interesting way of illustrating the economic value of people over time and their contribution to a successful team and business. It may also help our colleagues in the investment world including private equity, asset management or banking better understand why good HR can add tremendous value to firms. It may also provide us with some ways of measuring whether we are able to add value to the business in HR through our activities.

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