"A compelling analysis of the challenges of investment management, and why investment management firms require innovation to succeed."
- Blake Grossman, CEO, Barclays Global Investors
"Great investment managers understand that positioning portfolios for clients should not be an act of conformity, but rather a constant journey of shifting fundamentals and opinion. Wayne and Ralph bring this fact to life by addressing some of the key challenges to serious investment thinking, using top-level researchers in their respective fields. For those investment managers and clients who want to go beyond the ordinary."
- Jeff Diermeier, former CEO of CFA Institute and retired CIO of UBS Global Asset Management
"The essays in this book provide an invaluable reference point of serious readings for money managers. The works provide the analyst with the most recent scholarship in a single book, presenting ideas and philosophy that will lead me back to its various sections time and time again."
- Kenneth S. Hackel, CFA, President, CT Capital LLC
"The crash of 2007–2009 brought a harsh conclusion to a quarter of a century of unprecedented growth and prosperity for the investment management industry, which faces no less a task than reinventing itself. Rieves' and Wagner's contribution to the way forward couldn't be timelier."
- Richard Ennis, Principal, Ennis Knupp + Associates
"This book uniformly focuses on the best practices to which investment management professionals should commit. I highly recommend this book to investment managers, sales people, and trustees of pensions, endowments, trusts, and mutual funds."
- Jack Clark Francis, PhD, Professor of Economics and Finance, Bernard Baruch College
Editorial Advisory Board.
Introduction: A Sea of Changes and Waves of Opportunity (Jacqueline Charnley and Christine Røstvold).
The 2008-2009 credit crisis roiled the already-turbulent environment in which asset managers confronted their stewardship challenges. The authors cite seven major elements of the “pre-crisis” turbulence, and remind readers of Darwin's dictum of survival. Proactive relationships with all the players are the key.
PART ONE: The Challenges of Changes and Crises.
Chapter 1 The Discontinuity Challenge (Wayne H. Wagner).
The twists and tangles of the 2008-2009 credit crunch will long be remembered. This chapter does not address that specific discontinuity, but discusses discontinuities in general. From a longer time perspective, we see that these discontinuities occur frequently, suggesting that in addition to applying our experience and running our models in “normal” times, we need to prepare to face the inevitable discontinuity environments. This is the first chapter of several in which we reflect on Taleb's Black Swan.
Chapter 2 The Sub-Prime Crisis as a “Predictable Surprise” Strategic Lessons to Be Learned (Keith Ambachtsheer).
The fallout from the events of 2008–2009 has engendered several million words of criticism, constructive and otherwise. Yet, very little relevant appraisal has come from the investment management industry. An enduring champion of pension reform describes the collective actions that can be effectively marshaled when confronted with another threat of asset erosion. Why, in this care, Bazerman and Watkins are more relevant than Taleb.
Chapter 3 The Solidarity Challenge (David G. Tittsworth, Esq.).
Compared to many other laws, the statutory framework of the Investment Advisors Act of 1940 is relatively simple and straightforward. The fiduciary culture it has fostered distinguishes the advisory profession from other financial services. Now, the basic legal and regulatory structure that has governed investment advisors for decades is being debated. Well-organized and well-financed groups seek to change the laws based on the 1940 Act., charging that they are “outdated” and “losing relevance”. The author suggests three actions to ensure that investment advisers work together to preserve what is good about how the advisory profession is governed.
PART TWO: Keeping the Challenges in Perspective.
Chapter 4 The Failure of Invariance (Peter L. Bernstein).
When published in 1996, Against the Gods: The Remarkable Story of Risk took its place as one of the seminal history books written in the twentieth century. Here is chapter 16 from that remarkable work. Many readers encountered for the first time Kahneman’s and Tversky's “Prospect Theory”. Investment managers who have not read Against the Gods are at a competitive disadvantage—big time.
Chapter 5 Inverted Reasoning and Its Consequences (G.C. Seldon).
Not for the first time, we anthologize this excerpt from Psychology of the Stock Market, first published in 1912. Sage observations from which the author observes “Historical parallels are likely to be misleading.”
Chapter 6 Fatal Attractions for Money Managers (Arnold S. Wood).
An experienced and innovative investment manager reflects on “the triumph of temptation over reason”, and offers a “list of ten causes of irrational, and occasionally bizarre, behavior” by professional investors.
Chapter 7 Renzo Gracie's Brazilian Jiu Jitsu Academy (Richard Bookstaber, PhD).
An elegant analogy illustrating how innovation, endogenous risks, and regulation should be contemplated so as to assure a market “that is more robust and survivable”. Excerpted from the best-selling A Demon of Our Own Design Hoboken: (Wiley, 2007).
Chapter 8 Managing Outside the Box (Robert A. Jaeger, Ph.D.).
This reflection on fads and fashion in the investment business provides an appropriate departure for studying Part three of this book: The Challenges Under Transformation.
PART THREE: The Challenges Under Transformation.
Chapter 9 The Evolving Challenges of Quantitative Investing (Robert L. Hagin, PhD and Kathleen T. DeRose).
The authors suggest that the rapid pace of technological change affects both fundamental and quantitative investors. Despite their similarities, quantitative investors, particularly those who acknowledge the limits of technology, are better equipped to deliver on their clients' performance expectations. As investment approaches begin to incorporate insights from beyond computer science, drawing from biology and other disciplines, the debate becomes a philosophical one about the frontier between the computer and the intellect.
Chapter 10 EMH and the Matter at Hand (Wayne H. Wagner and Ralph A. Rieves).
Do nanosecond changes in “publicly available information” and the behavioral school's challenge require a reappraisal of a fundamental postulate of investment theory? Why is Taleb relevant?
Chapter 11 The Attribution Challenge (Ron Surz).
Performance standards focus on accurate measurements and reporting. But the most accurate measurements can be misinterpreted when compared to faulty benchmarks. Here is an extensive discussion about accurate benchmarking and rigorous attribution analysis. Tiger Wood's bowling scores are not relevant to his achievements.
Chapter 12 The Academic Challenge An Interview with Professor Stephen Brown on Developments in Modern Finance (Harry Liem).
Some of the great questions of financial theory remain with us. A respected academic candidly answers some well-posed questions about “book-smart” and “street-smart”. The answers are relevant and pertinent, regardless of occasional systemic disorder.
Chapter 13 The Elusiveness of Investment Skill (Robert A. Jaeger, PhD).
The author of this chapter turns from commenting on fads and fashions to reflecting on investment skill. Skill is elusive, but it is not illusionary. He argues that skill is real precisely because it is elusive. “The barriers to entry in the hedge fund business are seductively low; the barriers to success are formidably high.”
PART FOUR: The Clients’ Challenges.
Chapter 14 The Client Challenge - Trustees as Leaders (Fiduciary 360).
Recent events have generated a new challenge for trustees. How boards are lead has emerged as an even more critical issue than it has been. The authors remind stewards of the four characteristics of a prudent procedure for discharging fiduciary duties: organize, formalize, implement, and monitor.
Chapter 15 The Kool-Aid® Quandary and the Enduring Lure of Outperformance (Edward Siedle, Esq.).
A seasoned observer of the money management industry reminds readers about the myth and reality of sustained outperformance. Clients who can't distinguish between myth and reality are more likely to be subject to chicanery. The burden is on clients to make that distinction, not on SROs or regulators. This theme is reiterated in several chapters of this book.
Chapter 16 The ESGI (née SRI) Challenge ("Dove Green").
The term socially responsible investing (SRI) has morphed into environmental, social, and governance investing (ESGI), and is sometime referred to as sustainable investing. Each of these terms has been used by the cadres of activists to describe their persuasive campaigns—the targets for which are now trustees, investment managers and corporations. Here is a discussion about the concerns of shareholder activists and social activists. Are ESG policies and procedures the new intangibles? Whatever the cause, fiduciary duty still trumps all.
Chapter 17 The Marketing Challenge (Ron Gold).
Investment managers do not have to differentiate themselves from the competition in huge ways. The real marketing challenge is to articulate in a convincing fashion how the differentiating “accrues to the benefit of the client”. Here are some insights and proposals for getting more than “just a ticket on the bus”.
Chapter 18 The Selection and Termination of Investment Management Firms by Plan Sponsors (Amit Goyal, PhD and Sunil Wahal, PhD, et al.).
We would have liked to have changed the title to 'Suspicions Confirmed'. This chapter appeared in the August, 2008 issue of The Journal of Finance and is reprinted in its entirety, including references and citations. A complete familiarity with this work is recommended for managers, consultants, and trustees throughout the world.
PART FIVE: The Execution Challenges.
Chapter 19 The Market Price Challenge (Francis Gupta, PhD and John A. Prestbo).
Are dark pools the sell side's survival tactic or revenge? Do the benefits of dark pools' lower trading costs outweigh diminished transparency? Over the past 20 years volume on Nasdaq has increased over 20,000 percent. Could one argue that innovation and adaptability have been achieved at reasonable costs to investors and beneficiaries?
Chapter 20 The Sell-Side Challenge (Steve Wunsch).
Legislated order-handling rules and "shredded" algorithmic trading destroyed the longtime sell-side business model. Investments to enhance technological proficiency devour capital. Buy side firms have more options. Is beefing up proprietary trading the best way to survive? Is there any future for the smaller sell-side firms? A veteran innovator and successful exchange officer reflects on relationships, regulation, and the cost of doing business on both sides.
Chapter 21 The Trading Challenge (Wayne H. Wagner).
Our co-editor opines on all the changes and reminds us that transactional basis points will always impact performance. And the clients know it.
Chapter 22: The Settlement Challenge (Steve Webb and Simon Bennett).
The globalization of asset allocation is just one of several pressures complicating clearing and settlement processes. The pressures are significant factors in the buy-side search for frictionless trades and low transaction costs. Two acknowledged experts discuss these factors in the context of driving down the costs “to the end investor”.
PART SIX: The Challenges to Management.
Chapter 23 Investment Belief Systems: A Cultural Perspective (John R. Minahan, CFA).
Beliefs permeate the investment business. They shape our decisions and our institutions. Beliefs themselves are shaped by culture, by professional training, by experience, and by deliberate attempts to clarify ambiguity and reduce uncertainty. In rapidly changing times, it is valuable to examine one's beliefs in light of theory, evidence, and alternative points of view.
Chapter 24 Ethical Leadership in the Investment Firm (Jim Ware, CFA, and Jim Dethmer, ThM).
The authors built this chapter by developing the concept of energetic integrity, which they describe as the preventive medicine against legal and ethical breaches. They conclude with a description of the key elements necessary for energetic integrity.
Chapter 25 The Adaptive Leader (Jim Ware, CFA).
The author suggests asking 14 questions to ascertain the effectiveness of a firm's leaders. Investment management is a talent business. Bad bosses will drive out good talent.
Chapter 26 The Staffing Challenge (Monika Müller).
The author identifies seven traits of portfolio managers. She describes a matrix composed of these characteristics, and explains how its use can enhance the recruitment and retention of consistently high performers. First, however, one should reflect on some research.
Chapter 27 The “Same Page” Challenge: Communicating Effectively (Jamie Goodrich Ziegler).
A veteran industry executive addresses the necessity of clear communications among all the players: consultants, sponsors, sell-siders, and portfolio managers. Some practical suggestions on overcoming barriers and misconceptions.
Chapter 28 The Data Management Challenge (Don DeLoach).
There forever will be challenges to the interdependency and efficiency of information systems. Here are some recommended approaches to designing, utilizing, and monitoring the “life'sblood” of the firm.
About the Editors.
About the Contributors.