The CFA Institute Research Foundation publishes thoughtful examinations of investment topics. They are publicly available and therefore of use not just to CFA charterholders but anyone.
The Research Foundation’s flagship output over the years has been monographs — “in-depth studies on specific topics” — which have been augmented by literature reviews on various subjects, shorter papers, and multimedia offerings. (Another relatively new set of offerings will be covered in the upcoming issue of the Fortnightly.)
A great breadth of content is available, matching the diversity of ideas at play in the ecosystem across asset classes and investment styles. The content is central to the ongoing work of investment professionals, marrying the theoretical and the practical. Below are just four topics out of many that could be highlighted.
The ecosystem
Among the monographs is The Industrial Organization of the Global Asset Management Business (Ingo Walter). It covers the basics regarding pension funds, mutual funds, alternative assets, and private wealth management — and the implications for asset management.
The friction between “industrial organization” and the responsibilities of professionals is pervasive. A literature review, The Principal-Agent Problem in Finance (Sunit Shah), provides an extensive bibliography of research about that problem, along with summaries of the findings; this excerpt is from the section on compensation structures:
If an investor’s incentives are not aligned with those of the manager, the manager often has both an incentive to act counter to the investor’s best interests and the ability to do so undetected. Given the magnitude of payment generally involved in asset management contracts, misaligned incentives have significant potential to override a manager’s fiduciary responsibility to his or her clients. Structuring such contracts optimally is, therefore, of the utmost importance.
Investment Management: A Science to Teach or an Art to Learn? (Frank Fabozzi, Sergio Focardi, and Caroline Jonas) examines the gap between theory and practice, and provides an easy guide to the status of the debate about some of the core tenets of modern finance.
Behavioral finance
Fund Management: An Emotional Finance Perspective (David Tuckett and Richard Taffler) is terrific; it maps out the emotional lives that drive the behaviors of portfolio managers. This review gives an overview of some of the ideas that are presented.
As noted in an earlier posting, “Forces in the Ecosystem,” Popularity: A Bridge between Classical and Behavioral Finance (Roger Ibbotson, Thomas Idzorek, Paul Kaplan, and James Xiong) provides a good exposition of the battle between mean reversion and momentum — and how “if higher prices are paid for the same economic outcomes, popularity sows the seeds of diminishing future returns.” The role of popularity in investment decision making not only sets up behavioral quandaries for market participants, but, according to the authors, is the “bridge” between the two main theories of finance these days.
Other monographs include Behavioral Finance: The Second Generation (Meir Statman), Emotional Intelligence and Investor Behavior (John Ameriks, Tanja Wranik, and Peter Salovey), and Behavioral Finance and Investment Management (edited by Arnold Wood; it is unfortunately only available in print).
Fiduciary responsibility
A Primer For Investment Trustees: Understanding Investment Committee Responsibilities (second edition, Jeffery Bailey and Thomas Richards) is an invaluable book. The first edition (reviewed here) was published barely more than a decade ago, but it did not include any references to OCIOs, which have exploded in popularity since then. The latest version addresses that trend and adds other updates, but still has the “takeaways” and “questions Molly should ask” on each topic that make it helpful reading for new and experienced trustees alike.
The move from defined benefit plans to defined contribution plans has changed the landscape of retirement funding. From Defined Contribution Plans: Challenges and Opportunities for Plan Sponsors (Jeffery Bailey and Kurt Winkelmann):
Virtually everyone acknowledges that the basic DC plan design is flawed.
We wrote this book from the viewpoint of the plan sponsor seeking to improve the DC system, and it follows five major themes: the plan participant, the plan sponsor, plan design, investments and investment managers, and asset decumulation in retirement.
Another important book in this category is Investment Governance for Fiduciaries (Michael Drew and Adam Walk). The authors use the OPERIS acronym to spell out the steps of the governance process that they examine: Objective, Policy, Execute and Resource, Implement, and Superintend. There are many important concepts included, among them “the fiduciary line” (marking the division between fiduciary responsibilities and ones related to implementation) and the need for a “hierarchy of investment objectives.”
The financial crisis
The four-decade march toward cheaper capital and higher prices had a few setbacks along the way, none more important than the global financial crisis. It was (and remains) a seminal event, shining unflattering light on the investment industry and profession and — somewhat surprisingly — continuing the trend of extraordinary market support that had begun twenty years earlier, even as there was a lot of tough talk and some increased regulation.
Insights into the Global Financial Crisis (edited by Laurence Siegel) was published in late 2009, less than a year after the nadir of the crisis. A number of contributors, including several well-known market players, try to make sense of the events; one section is simply titled, “What Happened?” (And one chapter, with the subheading “What Were We Thinking?” relates to the topics of behavior, principal-agent problems, and industry structure mentioned earlier.) The essays provide a multidimensional look at the specific conditions that led to the cataclysm, as well as the age-old tendencies that drive people in markets to do similar things every once in a while. Useful reading even now.
Time adds perspective. Investment Management after the Global Financial Crisis (Frank Fabozzi, Sergio Focardi, and Caroline Jonas) looked at the implications for the industry in 2010, using interviews with a wide range of market participants to identify anticipated areas of change. A 2018 conference sponsored by the Research Foundation reflected back on the crisis; the presentations are available online. Short summaries of them can be found in a brief, Ten Years After: Reflections on the Global Financial Crisis (Laurence Siegel and Luis Garcia-Feijóo).
All of these provide the opportunity to compare what was expected to happen to what has actually happened, and to ponder whether the crisis was wasted in terms of making critical changes — and how well prepared we are for the next firestorm.
Published: September 9, 2022
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