By Lars Dijkstra
In 2012 a group of leading global investment professionals formed the 300 Club to respond to an urgent need for experienced investment professionals to raise uncomfortable and fundamental questions about the very foundations of the investment market theory and practice.
Our 15 members don’t have all the answers, but like the legendary 300 Spartans, we hope by our actions we can raise enough awareness of this threat and allow the industry time to realign itself. Since 2012 several of our members have published thought-provoking and widely-debated white papers.
Collectively we have made the following points:
1. Over-reliance on complex financial models and structures will not deliver the Holy Grail – quite the reverse. In The death of common sense, Professor Amin Rajan eloquently described how theories, such as EMH and CAPM continue to shape the psyche of financial investors and policymakers and has contributed to the 2008 market collapse. Stefan Dunatov, CIO at Coal Pension Trustees, explores this further in his paper Defining true risk. In his view, there are two big problems: the inability to identify the right risks when considering investment objectives and measuring those risks the wrong way. Volatility doesn’t measure real risk, but most investors and regulators still use it this way. In his paper, Managing risk in a complex world, Idaho State pension fund CIO Bob Maynard recommends the best risk control in a non-linear world comes from being able to see, relatively easily, all the investments in the portfolio, their behaviours and how they fit together.
2. The relatively benign markets over the last 30 years have encouraged the view that a ‘risk free’ baseline exists. Saker Nusseibeh, CEO of Hermes Investment Management, stated in our Charter: ‘The mere fact that much of regulatory and fiduciary behaviour is driving investors towards risk-free behaviour at a time when all the evidence points towards those strategies being far from risk free is testament to the folly of current collective wisdom.’ Alan Brown, former CIO of Schroders, concluded in his paper Dynamic asset allocation and fund governance, that today’s best practice model of pension funds is way too static. A fund’s risk appetite should be managed much more dynamically and should be a function of ex-ante risk premia and wealth.
3. Investment professionals have become too product-orientated – at the expense of their clients. In my own paper, From short-term salesmanship to long-term stewardship, a paradigm shift in the asset management industry, I concluded that our industry should reinvent itself. This requires new leadership. We should be the counsel to help our clients, private or institutional, create and preserve wealth. In his most recent paper, Lessons of the last 40 years for the next 20, Alan Brown concluded: ‘The smart part of our industry will start to act in a counter-cyclical fashion. That after all is how you buy low and sell dear.’
The 300 Club is not the only forum asking fundamental questions; it’s exciting to see the CFA Institute soul-searching its curriculum in it latest book and we expect more to follow.
Lars Dijkstra is chairman of the 300 Club and chief investment officer at Kempen Capital Management
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