Can Patient Capital Stay Patient? Navigating Short-Term Pressures
By Rick Funston, CEO Funston Advisory Services and Board Smart LLC Adapted from “Transforming the Dialogue: Fiduciary Essentials”, Amazon 2025
Institutional investors such as public retirement systems, multi-employer plans, sovereign wealth funds, foundations and endowments operate with a distinct advantage: their patient, long-term investment horizon allows them to weather market volatility and pursue strategies that shorter-term investors cannot. However, this patient capital comes with its own unique set of strategic challenges that require careful navigation and sophisticated management approaches.
The Dual Nature of Time Horizons
One of the most persistent challenges these institutions face is reconciling their long-term mission with short-term performance pressures. While their fundamental purpose is to build wealth over decades, stakeholders often demand quarterly or annual results that meet specific benchmarks.
This creates a fundamental tension where investment committees may feel compelled to make decisions that serve immediate performance metrics rather than optimal long-term strategy. The pressure can be particularly intense during market downturns, when stakeholders may question patient investment approaches despite their proven effectiveness over longer periods.
Portfolio Construction and Asset Allocation
Building and maintaining a diversified portfolio that can withstand various market disruptions while optimizing returns represents another significant challenge. Institutional investors must carefully balance risk and return across multiple asset classes, geographic regions, and investment strategies. The complexity increases when considering alternative investments like private equity, real estate, and infrastructure, which offer diversification benefits but require specialized expertise and longer commitment periods. Poor asset allocation decisions can have lasting consequences, potentially undermining decades of careful wealth building.
The Liquidity Balancing Act
Managing liquidity presents a unique challenge for institutional investors who must ensure they can meet their obligations—whether pension payments, endowment distributions, or other liabilities—while maintaining optimal long-term investment positions. This becomes particularly challenging during market stress periods when liquidity may be scarce and asset values are depressed.
The risk of being forced to sell assets at inopportune times to meet liquidity needs can create realized losses that significantly impact long-term performance.
Governance and Organizational Effectiveness
Effective governance structures are crucial but often complex to implement and maintain. These institutions must establish clear roles and responsibilities across investment committees, staff, and external managers while ensuring robust oversight and accountability mechanisms. The challenge intensifies when governance structures involve multiple stakeholders with varying levels of investment expertise and potentially conflicting interests. Weak governance can lead to delayed decision-making, missed opportunities, or inadequate oversight of investment risks
Comprehensive Risk Management
Modern institutional investors face increasingly sophisticated risk management challenges. Beyond traditional market risks, they must address operational risks, liquidity constraints, and, for pension funds, actuarial risks that can span decades. The complexity of modern investment portfolios, which often include alternative investments and complex derivatives, requires comprehensive risk oversight capabilities. Fragmented or inadequate risk management can result in unexpected losses or failure to capitalize on appropriate risk-adjusted opportunities.
The Role of Environmental, Social, and Governance Factors
The role of ESG factors in institutional investment decision-making remains one of the most contentious strategic challenges facing these organizations today. A vigorous debate continues over whether environmental, social, and governance considerations are appropriate—or even permissible—elements of fiduciary decision-making.
Some stakeholders argue that ESG integration is essential for long-term value creation and risk management, pointing to evidence that ESG factors can materially impact investment returns over time. Others contend that fiduciary duty requires exclusive focus on financial returns, viewing ESG considerations as potentially compromising this obligation or introducing political considerations into investment decisions.
This ongoing debate creates significant strategic complexity for institutional investors. They must navigate between stakeholders who demand robust ESG integration and those who view it as a breach of fiduciary responsibility. The challenge is compounded by evolving legal interpretations, varying regulatory guidance across jurisdictions, and limited consensus on how ESG factors should be evaluated and weighted against traditional financial metrics. Institutional investors find themselves needing to develop defensible frameworks that can withstand scrutiny from multiple perspectives while potentially facing legal challenges regardless of their chosen approach. The uncertainty surrounding appropriate ESG integration continues to create operational complexity and strategic risk for these long-term-focused institutions.
Technology and Data Infrastructure
Modern investment management increasingly relies on sophisticated data analysis and technology infrastructure. Institutional investors must develop systems that can handle vast amounts of data from multiple sources while ensuring accuracy, security, and accessibility for decision-makers.
The challenge extends beyond simply collecting data to developing analytics capabilities that can provide meaningful insights for complex investment decisions. Inadequate infrastructure can create operational inefficiencies and potentially compromise investment performance.
Human Capital Challenges
Attracting and retaining qualified investment professionals represents an ongoing challenge, particularly given the specialized nature of institutional investing and competition from private sector firms that may offer higher compensation. The challenge extends beyond investment staff to include board members and committee participants who must understand increasingly complex investment strategies and oversight responsibilities. High turnover or inadequate expertise can undermine organizational continuity and strategic execution.
Regulatory and Legislative Adaptation
Institutional investors must navigate a rapidly evolving regulatory landscape that includes changes in investment regulations, tax codes, and for public pension funds, pension reform legislation.
These changes can significantly impact investment strategies, operational requirements, and costs. The challenge is compounded by the fact that regulatory changes often occur on political timelines that may not align with optimal investment timing, requiring institutions to adapt their strategies while maintaining long-term focus.
Stakeholder Communication and Alignment
Maintaining effective communication with diverse stakeholders—including plan members, beneficiaries, regulators, legislators, and the general public—requires sophisticated communication strategies. These stakeholders often have varying levels of investment knowledge and different priorities, making it challenging to explain complex investment approaches and results clearly. Poor communication can lead to external pressures that disrupt long-term strategies or create unrealistic expectations that compromise optimal investment decision-making.
The Path Forward
Successfully managing these strategic challenges requires institutional investors to develop comprehensive approaches that integrate clear policies, strong governance structures, sophisticated risk management capabilities, aligned incentive systems, and robust stakeholder engagement strategies. The institutions that will thrive are those that can maintain their long-term focus while effectively addressing short-term pressures and building the organizational capabilities necessary to navigate an increasingly complex investment environment.
The key to success lies not in eliminating these challenges—many are inherent to the institutional investor model—but in developing sophisticated management approaches that acknowledge their complexity while maintaining focus on long-term value creation for beneficiaries and stakeholders. All of these strategies require the shared understanding, acceptance, and commitment of the board.
For more information, contact rfunston@funstonadv.com or visit our website at www.funstonadv.com
