Investment management : meeting the noble challenges of funding pensions, deficits, and growth

483 Pages·2009·35.666 MB·English

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

(continued from front flap) WAGNER $135.00 USA/$162.00 CAN
Part IV offers insights on client-side challenges
Investment Management RIEVES
and provides professionals with a better under- T
Praise for oday’s investment professional faces the for-
standing of what the business is all about
midable challenge of funding the retirement
Part V describes the transactional aspects of port-
of millions of workers as well as meeting the
folio management—from understanding the tech-
I capital formation needs that sustain businesses
nology to executing cost-effective trades “A compelling analysis of the challenges of investment management, and why
n around the world. During these extremely volatile
Part VI focuses on the attributes and characteris- investment management fi rms require innovation to succeed.”
M times, the rate at which changes are occurring in
tics necessary to sustain the growth of a fi rm—
—Blake Grossman, CEO, Barclays Global Investors e v areas directly impacting the practice of investing
from substantiating policy and building a profes- e
sional team to utilizing emerging technology “Great investment managers understand that positioning portfolios for clients tin e has forced individuals in this fi eld to “think about
g their thinking” and reexamine some of their long-
As a professional in the investment industry—and sfuhnodualmd ennotta lbs ea nadn oapctin oiof nc. oWnafoyrnme iatyn,d b Ruat lpraht hberirn ga tchoisn sftaacnt tt ojo luifren beyy aodf dsrheisfstiinngg th s standing assumptions.
e
steward of the world’s assets—you need to adjust some of the key challenges to serious investment thinking, using top-level N t Wayne Wagner—a leading fi nancial thinker whose
accordingly to changing markets, as well as reas- researchers in their respective fields. For those investment managers and o
sess the way you manage money. Investment clients who want to go beyond the ordinary.” b m Investment work on investment management effi ciency has
le saved investors billions of dollars—and Ralph
Management will put you in a better position to do —Jeff Diermeier, former CEO of CFA Institute and retired CIO of C Rieves—an experienced fi nancial editor and advi-
this, and much more, as it offers practical guidance UBS Global Asset Management h e
a sor, who’s worked with some of the best minds
on navigating an ever-evolving fi nancial landscape. l
l in the business—understand the issues affect-
e
“The essays in this book provide an invaluable reference point of serious read- n n ing investment managers, fi duciaries, trustees,
WAYNE H. WAGNER is the founding and lead ings for money managers. The works provide the analyst with the most recent g
principal of OM NI and a founding principal of scholarship in a single book, presenting ideas and philosophy that will lead me es t Management and regulators striving to meet the challenges of
Wilshire Associates. He is known for his pioneer- back to its various sections time and time again.” o funding pensions, defi cits, and growth. Now, with
ing work in designing balancing algorithms for —Kenneth S. Hackel, CFA, President, CT Capital LLC f Fu M Idnrveessst mtheenste M isasnuaegse mthernotu,g Wh atghnee rc oanntdr ibRuietivoenss aodf-
the world’s fi rst operational index fund, and later n
d acknowledged authorities from various investment
developed methods to deal with the hidden de-
“The crash of 2007–2009 brought a harsh conclusion to a quarter of a century in management companies, consulting fi rms, profes-
lay and opportunity costs of trading. Wagner has of unprecedented growth and prosperity for the investment management g a
authored, coauthored, or edited many books and industry, which faces no less a task than reinventing itself. Rieves’ and P sional associations, and universities.
e
articles, and is a frequent writer and speaker on Wagner’s contribution to the way forward couldn’t be timelier.” n n
s Current turmoil in the capital markets has made global
investment management and fi duciary duties. He i
—Richard Ennis, Principal, Ennis Knupp + Associates o a Meeting the Noble Challenges of Funding fi nancial stewardship a diffi cult endeavor, but by
holds two Graham and Dodd Awards from the n
s facing reality, focusing on clients, and reexamining
Financial Analysts Journal for excellence in ,
“This book uniformly focuses on the best practices to which investment D g Pensions, Deficits, and Growth assumptions, you can continue to succeed, and
fi nancial writing.
management professionals should commit. I highly recommend this book to e
Investment Management will show you how. Divided
f
RALPH A. RIEVES is the managing director investment managers, sales people, and trustees of pensions, endowments, ici e Foreword by Joel Chernoff, Executive Editor, Pensions & Investments into six comprehensive parts—with contributions
trusts, and mutual funds.” t
of Farragut Jones & Lawrence. He was the fi rst s, m from a roster of top professionals and academics
editorial director of the Dow Jones-Irwin imprint —Jack Clark Francis, PhD, Professor of Economics and Finance, a including Peter Bernstein, Richard Bookstaber,
n
and was one of the founding editors of the Journal Bernard Baruch College d Robert Jaeger, Arnold Wood, and Francis Gupta,
of Investment Consulting. He is a recipient of the G e among others—this well-rounded resource:
r
book industry’s Bowker LMP Award for editorial o
w n Part I explores the turbulence and changes within
achievement. t
h the industry, and suggests what it might take to
Jacket Design: Loretta Leiva t
fulfi ll your investment obligations moving forward
Jacket Photograph: © Alamy
Part II details some attitudinal challenges that the
fi nancial world will always face
wileyfi nance.com
Part III addresses the “town and gown” aspects
of the investment process through discussions of
theory and practice
Edited by Wayne H. Wagner and Ralph A. Rieves
(continued on back flap)
EAN: 9780470455944 ISBN 978-0-470-45594-4
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E1FFIRS 06/06/2009 15:29:11 Page1
Investment
Management
E1FFIRS 06/06/2009 15:29:11 Page2
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Investment
Management
Meeting the Noble Challenges
of Funding Pensions, Deficits,
and Growth
WAYNE H. WAGNER
and
RALPH A. RIEVES,
Editors
John Wiley & Sons, Inc.
E1FFIRS 06/06/2009 15:29:11 Page4
Copyright#2009byFarragut,Jones&Lawrence,Inc.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData
Investmentmanagement:meetingthenoblechallengesoffundingpensions,deficits,and
growth/WayneH.WagnerandRalphA.Rieves,editors.
p.cm.
Includesindex.
ISBN978-0-470-45594-4(cloth)
1. Investments–UnitedStates. 2. Businesscycles–UnitedStates. I. Wagner,WayneH.
II. Rieves,RalphA.
HG6041.I582009
332.6–dc22
2009005642
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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ToSumnerandCarolineLevine,withenduringregard.
—RAR
ToLarryCuneo,for40yearsoffightingthegoodbattlestogether.
—WHW
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E1FTOC 06/08/2009 15:50:48 Page7
Contents
Foreword xvii
Preface xix
Acknowledgments xxv
EditorialAdvisoryBoard xxvii
INTRODUCTION:
ASeaofChangesandWavesofOpportunity 1
JacquelineCharnleyandChristineR(cid:1)stvold
The2008–2009creditcrisisroiledthealready-turbulent
environmentinwhichassetmanagersconfrontedtheir
stewardshipchallenges.Theauthorscitesevenmajor
elementsofthe‘‘pre-crisis’’turbulence,andremindreaders
ofDarwin’sdictumofsurvival.Proactiverelationships
withalltheplayersarethekey.
PARTONE:
TheChallengesofChangesandCrises
CHAPTER1
TheDiscontinuityChallenge 27
WayneH.Wagner
Thetwistsandtanglesofthe2008–2009creditcrunchwill
longberemembered.Thischapterdoesnotaddressthat
specificdiscontinuity,butdiscussesdiscontinuitiesin
general.Fromalongertimeperspective,weseethatthese
discontinuitiesoccurfrequently,suggestingthatinaddition
toapplyingourexperienceandrunningourmodelsin
‘‘normal’’times,weneedtopreparetofacetheinevitable
vii
E1FTOC 06/08/2009 15:50:48 Page8
viii CONTENTS
discontinuityenvironments.Thisisthefirstchapterof
severalinwhichwereflectonTaleb’sBlackSwan.
CHAPTER2
TheSub-PrimeCrisisasa‘‘PredictableSurprise’’:Strategic
LessonstoBeLearned 44
KeithAmbachtsheer
Thefalloutfromtheeventsof2008–2009hasengendered
severalmillionwordsofcriticism,constructiveand
otherwise.Yet,verylittlerelevantappraisalhascome
fromtheinvestmentmanagementindustry.Anenduring
championofpensionreformdescribesthecollective
actionsthatcanbeeffectivelymarshaledwhenconfronted
withanotherthreatofasseterosion.Why,inthiscase,
BazermanandWatkinsaremorerelevantthanTaleb.
CHAPTER3
TheSolidarityChallenge 58
DavidG.Tittsworth,Esq.
Comparedtomanyotherlaws,thestatutoryframeworkofthe
InvestmentAdvisorsActof1940isrelativelysimpleand
straightforward.Thefiduciarycultureithasfostered
distinguishestheadvisoryprofessionfromotherfinancial
services.Now,thebasiclegalandregulatorystructurethat
hasgovernedinvestmentadvisorsfordecadesisbeingdebated.
Well-organizedandwell-financedgroupsseektochangethe
lawsbasedonthe1940Act,chargingthattheyare‘‘outdated’’
and‘‘losingrelevance.’’Theauthorsuggeststhreeactionsto
ensurethatinvestmentadvisersworktogethertopreserve
whatisgoodabouthowtheadvisoryprofessionisgoverned.
PARTTWO:
KeepingtheChallengesinPerspective
CHAPTER4
TheFailureofInvariance 81
PeterL.Bernstein
Whenpublishedin1996,AgainsttheGods:TheRemarkable
StoryofRisktookitsplaceasoneoftheseminalhistorybooks