We are approaching the end of several overlapping super cycles in the world economy and financial markets that had given a relatively long period of superficially benign macroeconomic trends. Today we face a progressively more uncertain and complex set of global economic fundamentals which are combining with an increasing (indirect) regulatory and industry drive towards costly and complex financial models and structures.
“We appear to be at an inflexion point every bit as dramatic as the one that launched the basis of modern investment thinking in the early 1950s. The 300 Club believes that current financial and investment market theory and practice is very likely to fail investors at their time of greatest need.”
The 300 Club is a gathering of some of the leading global investment professionals whose mission is to raise awareness of the potential impact of current market thinking and behaviours. Over the course of time, the 300 Club will spotlight some of the most irrational and dangerous of current market behaviours.
Investment Trends and Related Problems
- “Over reliance on complex financial models and structures will not deliver the holy grail – quite the reverse”. There is an increasing belief that complex and expensive financial models and Investment structures will deliver an improved outcome for investors. Whilst analytically this may look good on paper there are severe limitations in the current thinking particularly when stressed by market dynamics which are likely to be increasingly atypical relative to market trends upon which these models and structures have been based. Added to this is the high level of structuring and investment cost buried in these structures which will invariably lead to relatively poor performance, irrespective of the market outcome
- “Investment professionals have become too product orientated – at the expense of their clients”. The consultant led best practice model of today serves our clients poorly. Investment managers struggle to “beat the benchmark”, a negative sum game for investors as a whole. We should instead be providing the help and advice, the counsel to help investors, private or institutional, achieve their real world goals. Provision of advice requires a holistic view of the challenge and takes the industry away from being essentially component part suppliers to a much more rewarding and valuable (to the end client) role.
- “The relatively benign markets over the last 50 years have encouraged the view that a “risk free” baseline exists and that in the medium/long term markets will always rise – these are false and very dangerous assumptions”. Over the centuries, history has shown that governments, countries and markets are far from risk free. Over reliance on a continuation of the implicit status quo is likely to prove extremely costly to those who chose to ignore the potential ultimate impacts of emerging instability. 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.
Each of the above trends is likely to have material adverse consequences for investors. Taken together, they represent an unprecedented convergence of flawed market theory and misaligned behaviours, which has all the ingredients to create a “perfect storm” for investors and the economies in which they operate.
The consequences for investment markets is the herding of investors into increasingly overpriced assets with the false promise of de-correlated return or lower risk. The basis on which most of these fashionable products are constructed is questionable and the basis of most modern models that assume a risk free baseline is equally flawed. Coupled with this, the orchestrated shift of investor interest away from “risk capital” is a major body blow for Western economies that desperately need investment capital to help regenerate their competitiveness to restore the health of their current and capital accounts.
The irony of the current state of affairs is that at the core of the current trends is a headline ambition to recognise, measure, manage and minimise risk. This increased focus is not just an individual investor knee jerk reaction to perceived greater risk and uncertainty, but is structurally embedded in the thinking of the regulators of investment markets across the globe, in the strategies pursued by major investing institutions and in the sponsors of Pension Funds and in their advisors. While this momentum has been gradually building under the heading of greater financial sophistication and risk management techniques, most recently it has been applied with particular alacrity and vigour in response to increased financial uncertainty.
The 300 Club believe that the most recent economic and investment trends will change the investing landscape over the next two decades and that we are at a turning point which presents huge dangers to ordinary savers. The club has been formed to respond to an urgent need for experienced investment professionals to raise uncomfortable and fundamental questions about the very foundations of the investment landscape. “We might not be able to offer all the answers, but, like the original 300*, we hope that by our actions we can raise enough awareness of this threat and allow the industry time to realign itself to meet the challenges and minimise their ultimate impact on the end investor.”
Members of the 300 Club:
Stefan Dunatov, Coal Pension Trustees (Chairman)
Saker Nusseibeh, Hermes Investment Management
Zuhair Mohammed, Aon Hewitt
Prof. Amin Rajan, Create Research
Robert Talbut, Former Royal London Asset Management
Alan Brown, Former Schroders
Yves Choueifaty, TOBAM
Bob Maynard, Public Employee Retirement System of Idaho
Christopher Ailman, CalSTRS
David Villa, State of Wisconsin Investment Board
Lars Dijkstra, Kempen Capital Management
Sally Bridgeland, FIA
Roger Urwin, Towers Watson
Ron Barin, Alcoa
Jan Straatman, LOIM
Pascal Blanque, Amundi
Ronald D. Schmitz, Virginia Retirement System
Mark Walker, Univest
Ted Eliopoulos, CalPERS
Sam Masoudi, Wyoming Retirement System
Russell Read, Alaska Permanent Fund
*The “300” refers to the legendary 300 Spartans who in 480 BC held off the vastly numerically superior invading Persian army at the Battle of Thermopylae to give sufficient time for the remaining Greek forces to regroup. The story of the 300 has become a symbol of what can be achieved by a small band of high conviction individuals against overwhelming odds.