We are pleased to announce the launch of Ricardo Research – an investment advisory business with a mission to transform the way that investors think about financial markets, with the ultimate goal of fostering a more socially useful financial system.

The launch of Ricardo Research is the culmination of a journey that began in 2007, when Paul Woolley founded The Centre for the Study of Capital Market Dysfunctionality at the London School of Economics. The Centre’s aim was, and remains, to develop a coherent framework to explain the real-world behaviour of financial markets, with a particular focus on their imperfections and social costs. In contrast to the efficient markets paradigm, with its idealised picture of perfect markets, the Centre focuses on the causes and consequences of chronic asset mispricing.

The new framework identifies delegation, by asset owners to asset managers, as a critical element in the generation of market dysfunctionality. By focusing on the agency issues that exist within the financial system, the research develops a more realistic understanding of capital markets that is consistent with empirical evidence. Where proponents of efficient markets see “anomalies” – the value and momentum premia and the low volatility anomaly – we see the essential characteristics of market behaviour with a clear explanation in delegation and misaligned incentives.

The research developed at the Centre has far-reaching implications for asset owners, who we see as the key agents of change in their role as stewards of large pools of capital. Ricardo Research will translate the research findings of the Centre into practical advice for large institutional investors – especially those with a long time-horizon and who are conscious of the social impact of their investment choices. The grounding of our advice in a robust body of theory differentiates us from mainstream investment consultants, who inevitably rely on an ad hoc mix of convention, experience, and a defunct theory to guide their advice and decisions.

There will be a free flow of ideas between the Paul Woolley Centre at the LSE and Ricardo Research, with Dimitri (Professor of Finance and Director of the Centre) sitting on the Board of Ricardo Research and playing an active role in the development of our ideas. We are particularly excited by the combination of practitioner and academic input into the idea generation process at Ricardo.

As part of our launch, we have posted three papers under the Ideas section of our website – we hope they provide food for thought and stimulate debate.

  • In A Model of Imperfection we outline the main elements of the framework developed at the PW Centre with a focus on benchmarking and momentum as the key drivers of market dysfunctionality.
  • Stabilising and Destabilising Strategies distinguishes 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.
  • A Precondition for Sustainability argues that without addressing the underlying barriers to long-term behaviour within financial markets, calls for asset managers and companies to adopt sustainable strategies are likely to fail.

We look forward to engaging in an active conversation with trustees, CIOs, asset managers and other interested parties as we seek to challenge the prevailing wisdom. Please get in touch if you would like to be part of the conversation!

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of our latest blogs

Defensive diversification

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”.

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Asset mispricing: the ignored externality

The 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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