Investment Management Meeting the Noble Challenges of Funding Pensions, Deficits, and Growth

by Wagner, Wayne H.; Rieves, Ralph A.; Chernoff, Joel

• ISBN13: 9780470455944
• ISBN10: 0470455942
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-08-10
• Publisher: Wiley

Summary

Timely insights on investment managementThis comprehensive guide will help investment managers, fiduciaries, trustees, and regulators face the difficult challenge of funding the retirements of millions of workers and meeting the capital formation needs of businesses at once. The famous contributors to Investment Management describe the theories and practices that endure and challenge investment professionals to reexamine their assumptions, face reality, and focus on their clients. The contributors include top names from investment management companies, consulting firms, professional associations, and academia.Ralph A. Rieves (Colorado Springs, CO) is the Managing Director of Farragut, Jones and Lawrence. Wayne H. Wagner (Venice, CA) is the lead principle of OMNI, and a founding principle of Wilshire Associates.

Author Biography

Wayne H. Wagner is the founding and lead principal of OMNI and a founding principal of Wilshire Associates. He is known for his pioneering work in designing balancing algorithms for the world's first operational index fund, and later developed methods to deal with the hidden delay and opportunity costs of trading. Wagner has authored, coauthored, or edited many books and articles, and is a frequent writer and speaker on investment management and fiduciary duties. He holds two Graham and Dodd Awards from the Financial Analysts Journal for excellence in financial writing.

Ralph A. Rieves is the managing director of Farragut Jones & Lawrence. He was the first editorial director of the Dow Jones-Irwin imprint and was one of the founding editors of the Journal of Investment Consulting. He is a recipient of the book industry's Bowker LMP Award for editorial achievement.

Table of Contents

Foreword

Preface

Acknowledgments

Editorial Advisory Board

Introduction: A of Changes and Waves of Opportunity

The 2007/8 credit crisis roiled the already turbulent environment in which asset managers confronted their stewardship challenges

The authors cite seven major elements of the ôpre-crisisö turbulence, and remind readers of Darwin's dictum of survival

Proactive relationships with all the players are the key

The Challenges of Changes and Crises.

The Discontinuity Challenge

The twists and tangles of the 2007/8 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 ônormalö 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.

The Sub-Prime Crisis as a ôPredictable Surpriseö Strategic Lessons to Be Learned

The fallout from the events of 2007 û 2008 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 to when confronted with another threat of asset erosion

Why, in this care, Bazerman and Watkins are more relevant than Taleb

The Solidarity Challenge

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 ôoutdatedö and ôlosing relevanceö

The author suggests three actions to ensure that investment advisers work together to preserve what is good about how the advisory profession is governed

Keeping the Challenges in Perspective.

The Failure of Invariance

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 20^th century. Here is chapter 16 from that remarkable work. Many readers encountered for the first time KahnemanÆs and Tversky's ôProspect Theoryö

Investment managers who have not read Against the Gods are at a competitive disadvantage - big time

Inverted Reasoning and Its Consequences

Not for the first time, we anthologize this except from Psychology of the Stock Market, first published in 1912. Sage observations from which the author observes ôHistorical parallels are likely to be misleading.ö

Fatal Attractions for Money Managers

An experienced and innovative investment manager reflects on ôthe triumph of temptation over reasonö, and offers a ôlist of ten causes of irrational, and occasionally bizarre, behaviorö by professional investors

Renzo Gracie's Brazilian Jiu Jitsu Academy

An elegant analogy illustrating how innovation, endogenous risks, and regulation should be contemplated so as to assure a market ôthat is more robust and survivableö

Excerpted from the best-selling A Demon of Our Own Design

Managing Outside the Box

This reflection on fads and fashion in the investment business provides an appropriate departure for studying Part III of this book: The Challenges Under Transformation

The Challenges Under Transformation.

The Evolving Challenges of Quantitative Investing

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

EMH and the Matter at Hand

Do nano-second changes in ôpublicly available informationö and the behavioral school's challenge require a reappraisal of a fundamental postulate of investment theory? Why is Taleb relevant?

The Attribution Challenge

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

The Academic Challenge An Interview with Professor Stephen Brown on Developments in Modern Finance

Some of the great questions of financial theory remain with us. A respected academic candidly answers some well-posed questions about ôbook-smartö and ôstreet-smartö

The answers are relevant and pertinent, regardless of occasional systemic disorder

The Elusiveness of Investment Skill

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

öThe barriers to entry in the hedge fund business are seductively low; the barriers to success are formidably high.ö

The ClientsÆ Challenges.

The Client Challenge ùTrustees as Leaders

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

The Kool-Aid^“ Quandary and the Enduring Lure of Outperformance

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

The ESGI

The term ôSocially Responsible Investingö (SRI) has morphed into ôEnvironmental, Social, and Governance Investingö (ESGI), and is sometime referred to as ôSustainable Investingö

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

The Marketing Challenge

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 ôaccrues to the benefit of the clientö

Some insights and proposals for getting more than ôjust a ticket on the busö

The Selection and Termination of Investment Management Firms by Plan Sponsors

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

The Execution Challenges.

The Market Price Challenge

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%

Could one argue that innovation and adaptability have been achieved at reasonable costs to investors and beneficiaries?

The Sell Side Challenge

Legislated order-handling rules and 'shredded' algorithmic trading destroyed the long-time 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

The Trading Challenge

Our co-editor opines on all the changes and reminds us that transactional basis points will always impact performance

And the clients know it

The Settlement Challenge

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 ôto the end investorö

The Challenges to Management.

Investment Belief Systems A Cultural Perspective

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

Ethical Leadership in the Investment Firm

The authors built this chapter by developing the concept of ôenergetic integrityö, which they describe as the preventive medicine against legal and ethical breeches. They conclude with a description of the key elements necessary for energetic integrity

The Adaptive Leader

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

The Staffing Challenge

The author identifies 7 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

The ôSame Pageö Challenge: Communicating Effectively

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

The Data Management Challenge

There forever will be challenges to the interdependence and efficiency of information systems

Here are some recommended approaches to designing, utilizing, and monitoring the ôlife's bloodö of the firm

About the Editors

About the Contributors

Index

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