The investment profession is not well perceived by society, and is not seen to be adding value, says Saker Nusseibeh, chief executive officer of Hermes Investment Management. Speaking at CFA UK’s Annual Professionalism Conference, Nusseibeh called for a new, more holistic approach to investing, saying that too much focus was being placed on ‘how’ things work, and not enough on ‘why’ the investment industry does what it does.
“Philosophy answers the question why. Science answers the question, how. I would like to suggest to you that all of our literature, everything you’ve learnt, everything we talk about, is all concerned with the how. How do we do it, how do we invest, how do we put the DB funds together. But actually we do not have a conversation about why. Why do we do what we do, what purpose do we have?”.
“Does that make sense to you? We created it, we are the movers of capital, we made this nonsense and we are responsible for this.”
The root cause of this is a ‘personality disorder’ that has affected all economists since the 19th century and all financial analysts since the 1950s, who felt that economics and finance were a science, Nusseibeh argues. “The truth is, it is not a science. But like scientists we have concentrated on how we do things. How do we do modelling? How do we do asset allocation? How do we get the best return for our clients. We have not asked, ‘why are we doing this? Because we haven’t answered the why, and we’ve concentrated on the how, we got in trouble.”
Nusseibeh cited data from a book written by former governor of the Bank of England Mervyn King. In The End of Alchemy: Money, Banking, and the Future of the Global Economy, King points out that the assets of the top ten banks in the United States in 2008 were 100% of GDP. In the UK, that figure was 500%.
“Does that make sense to you? We created it, we are the movers of capital, we made this nonsense and we are responsible
for this,” Nusseibeh argues. In the US the figure is now 60% of GDP and in the UK it is still 450% of GDP. Nusseibeh also cited other research. According to the Bank of International Settlements (BIS), the size of capital markets today is $250 trillion; however the size of pension funds world-wide is approximately $38 trillion. “So let’s say there’s another $12 trillion in savings that are not in pension funds. That’s $50 trillion. What is this other stuff that we’ve created, what does it do?”
He also referred to a paper by Professor John Kay, author of the Kay Review, which pointed out that the size of foreign exchange deals in the world are one hundred times the size of all the trade in the world. “Foreign exchange is meant to be about trade. But people like us are moving forex around for no reason.”……article continued in the Summer 2016 issue of Professional Investor [login required].