Carlo Svaluto Moreolo explores a paper published by 300 Club founder Saker Nusseibeh arguing that investment managers need to re-assess the very foundations of their economic thinking
In a broad sense, investment has always existed, perhaps even before the growing of crops was man’s main preoccupation. The concept of investing is mainly linked to deferred gratification, making it an essential psychological tool for survival.
To some, it appears the original science behind investment is fundamentally flawed. The 300 Club, set up to challenge the foundations of the investment industry, is part of that group. In a recent paper, its founder, Saker Nusseibeh, highlights one of these flaws. He argues that investors evaluate the costs and benefits of investments as if they were cut off from the very system that is shaped by the results of their evaluation. This, says Nusseibeh, is simply wrong.
In this vein, the industry needs to realise it is part of the financial system and act accordingly. It needs to adopt a more holistic approach to investment because clients bear the brunt of decisions – both as beneficiaries of investment returns and as citizens of the world shaped by those decisions.
It is paramount the industry accept that it is part of an integrated system, which it shapes through beliefs and actions. However, I would go further and suggest it is ridiculous for any firm to assess investments using self-styled ‘scientific’ models that consider the firm a price-taker but not a price-setter as well. What use is a company deciding what the fair price of an asset class should be, when the price itself is largely affected by the outcome of its decisions, in a classic example of a feedback loop?
The 2008 crisis offered compelling evidence this would be the case. It also showed – and Nusseibeh clearly states this – when “markets” get prices wrong, and destroy the perceived value of assets, losses are transferred to individuals through public debt.
To re-start working in an “efficient” manner, markets need to write off worthless assets, and only public institutions can do this because they can absorb the cost of those losses by reducing public services. Yet asset prices are increasingly detached from the real economic value. The post-crisis years show that – financial markets have got very much back on their feet, but the global economy is far from healthy.
How long will equities go up, unsupported by an acceleration of global growth, before they crash and once again stifle the “recovery” of the economy? How long can this recovery be delayed as large parts of the population get poorer and a very small part gets richer? If it is true the global asset management industry holds the world’s wealth, then managing it is not going to plan.
Originally, stock markets were simply a means to spread entrepreneurial risk. Shareholders were able to take some entrepreneurial risk and share it with the entrepreneurs themselves, which may have been the main owners. But the model of joint ownership has simply broken down. Instead, markets resemble a bloated mass of fictitious money.
And this leads to Nusseibeh’s key argument. We know that the social cost of having large firms with absentee owners is very high. And in that sense, it seems the 300 Club, through its paper, is talking the talk. Tying this together, Nusseibeh says economic theory in investments needs improvement. However, he says, while consensus around its flaws grows, a consensus around an alternative method does not.
“We need to rethink the purpose of investment from the perspective of the individual savers whose capital we hold in trust, and move away from concentrating solely on nominal financial returns,” he writes. This means being less concerned with meeting nominal liabilities or benchmarks and thinking of long-term outcomes for the asset owners, or members.
Nusseibeh’s approach means the very foundations change, starting from the understanding of economics, financial theory and the role of investment. But changing the industry in this way might involve forgoing some profit.
So what will it take before someone actually walks the walk? Think of all the investment managers advocating ESG because of the evidence that it makes their clients more money. As a consequence of more ESG investments, they would also make more money.
Nusseibeh should be prepared to reject this approach. To improve the functioning of the financial markets, they need to be made more efficient – not in the sense that they price assets more fairly and rapidly but in the sense that they are capable of financing the growth of a more equitable social economy.
This entails more patience by investors and shareholders of companies, and requires more regulation as well as an aptitude for trial and error. Which, by definition, may entail less money in the industry’s pocket.