The social utility of an ever-expanding asset management industry is rarely discussed. In this note we distinguish between different strategy types on the basis of their impact on market stability. We argue that destabilising strategies impose a largely unrecognised negative externality on society.
Tell Me MoreInnovation is usually viewed by economists as a productivity-enhancing force, powering economic growth in modern capitalist societies. This is just as true in the investment industry, where new products are assumed to help consumers meet their individual financial needs. This optimistic view ignores the damage that can be done by innovations, especially in the financial sector, where agency issues create the potential for negligence and rent extraction.
Tell Me MoreMainstream finance theory offers an idealised view of how financial markets work and, as a result, fails to provide practitioners with a useful basis for decision-making. By studying the effects of delegation from asset owners to asset managers, we develop a more realistic and useful understanding of financial markets and point towards actions that would improve outcomes for savers and wider society.
Tell Me MoreThe PW Centre produces and disseminates high-quality research focused on the workings of capital markets and the social efficiency of allocations achieved in these markets.
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By treating diversification as an unmitigated good, investors by and large ignore the damage that it does to returns. We would do well to channel Buffett who once remarked that “diversification is protection against ignorance; it makes little sense if you know what you’re doing.” The outcome of an obsession with benchmark-relative performance together with principal-agent problems is “defensive diversification”.
Tell Me MoreThe externalities of greatest interest in contemporary discussion typically fall under the E, S and G headings. However, this leaves a critically important externality – that of asset mispricing – largely ignored. Asset owners should broaden their awareness of the externalities that arise from their investment approach.
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