February 1, 2017

Active should mean engaged

The turn of the year is a time for the asset management industry to discuss its views on how markets will fare in the year ahead. Unfortunately, too often these views are of little value to investors.

This is not necessarily because asset management firms are bad at forecasting asset price movements. It is rather that they have a vested interest in talking up prices. An investment firm saying that it will buy equities because it sees opportunities is enticing other investors to buy in as well. The firm may well see genuine value in the market but just by stating its views it is influencing prices. The likelihood that there will be remaining value after prices have been artificially elevated in the short term is debatable.

This would not be a problem if the financial markets had not become a haven for short-termism and greed. The theoretical role of the markets as a hub of the capitalist economy is hard to dispute. Yet, in practice, there is too much emphasis on capitalising on quick returns and too little focus on the long term.

The asset management industry should reconsider its role if this problem is to be addressed. It needs a holistic approach.

Read the full article on IPE