Project management uncertainty and asset management

Uncertainty and complexity are the two biggest problems facing any project. The book Managing the Unknown focuses on how to deal with these issues for any development project, but this work or process for dealing with uncertainty and complexity is also applicable within asset management. Fitting this framework within the asset management field provides some different insights into the decision process for a money manager.

The authors define complexity by the amount of interactions necessary to successfully manage the task or project. Any project that needs little interaction is not complex. Constant adjustment adds to complexity. The same simple framework can be applied to investment work. In asset management, the passive or index portfolio is not complex. It is easy to manage with few actions.  Holding a passive portfolio is also not complex. The only choice is a finding a benchmark. Active management has a high degree of decision actions and complexity. It is complex to manage an active portfolio because so many decisions have to be made on what to hold and how to adjust. The choice of buying an active strategy is also complex because it requires more decisions or actions on how to make that choice. If you undertake more complexity or a strategy requires more action, then control systems have to be put into place to manage or monitor this process.   

Variation in action and complexity needs planning and control. Low complexity with foreseeable events needs risk management that identifies and prioritizes issues, but may not require a lot of market interaction. Unknown unknowns require managing the residual risks from the fall-out of events that could not be foreseen. As complexity increases, the action required by the manager increases ad are more nuanced. 

All project management requires learning about the complexity and uncertainty faced, selecting processes that fit the situation, and working to form combination of actions that can meet the specific challenges or risks that will arise. There has to be buffers in place to ensure uncertainty can be addressed or mitigated.

In asset management, one simple choice is to form diversified passive portfolios. The other extreme is forming portfolios that require more interaction to deal with changing uncertainty. We could call these action-response portfolios. If a problem arises, action will be taken to mitigate the risk. Part of the asset management process is finding the "project management" that can deal with uncertainty and the level of complexity that matches the behavior of the investor.