Pension Insurance Corporation, London, UK
Asset management – the investment industry – is huge. It will invest more than $111 trillion worldwide by 2020. It already controls £5.7 trillion in the UK today.
How that money is invested matters. Britons rely on the asset management industry for retirement security, for vacation savings, for buying a home, or just to save generally. British industry and commerce rely on it to finance the real economy and to create jobs.
But how well does today’s asset management industry work? Are its interests aligned with savers and the real economy? Might it do better?
In this paper, Jim Hawley and Jon Lukomnik examine those issues. They suggest that the combination of how the industry is structured, combined with the dominant investment theory of today, results in a decidedly mixed picture. On the one hand, there is tremendous expertise available to ordinary savers, access to diversified investments either through active managers, tracker funds or, increasingly, what has come to be called factor investing in which certain characteristics of a pool of investments are sought or avoided. On the other hand, there are misalignments between the incentives of the industry and those of the individual (and institutional) investors who are its ultimate clients and should be its ultimate beneficiaries; complexity, a multiplicity of fees (many of which are opaque), and short-termism. Perhaps more importantly, they demonstrate how the limitations of today’s investing paradigm ignore systems-level risks to investing, from overarching ones like climate change, to internal financial ones like market distortions caused by popular investment products.
Hawley and Lukomnik suggest a number of incremental fixes, such as a simple fee statement equivalent to the nutrition statements which appear on prepared foods, and a “do-no-harm” Hippocratic Oath for the industry. The key recommendation, however, goes to the heart of how we invest. They suggest that taking systems issues into account would improve the returns for all participants: individual investors, institutional investors, and even the industry itself.