The global investment industry must take “bold action” to reclaim its purpose as an engine of long-term economic prosperity instead of a short-term paper-shuffling machine, according to MFS global distribution co-head, Carol Geremia.
In a new paper titled ‘Playing a bigger game’, Geremia argues that the investment sector has become increasingly disconnected from “real world outcomes” as various forces skew the rules of engagement.
For example, she says benchmark performance-chasing has increased in a world where there are 2.4 million indices and just 43,000 listed companies.
“The real misalignment is between time and risk and has created a paradox,” Geremia says. “On one hand, we’re taking more risk, exposing investors and portfolios to greater potential losses. On the other hand, we have less time to manage the risk and pressured to measure short-term performance at the expense of long-term value.”
Furthermore, she says as investors have adapted to manage the challenges of ever-more complex, interconnected and fast-moving markets “new, unchecked risks” entered the financial system.
And those risks centre on four main developments: the rise of passive management; the corresponding decline of active investment; the growth of illiquid alternative markets; and, the “messy attempt to address systemic risk through ESG”.
While passive management has delivered lower costs and instant diversification, Geremia says the indexing shift has changed market dynamics as well as obscuring “the role of active managers as stewards of capital and fundamental to price discovery”.
Despite offering potential benefits, private markets also come with “unique risks”, she says. The opaque, non-standardised ESG movement has led to confusion and a political quagmire rather than enlightenment.
“Because of the significant challenge these risks pose to the investment industry… we need to ask the big ‘GULP’ question – are we simply moving capital or are we investing it?
“Are we investing in paper or real businesses? The answers will not only shape the future but determine how well we build resilience into our purpose and portfolios.”
The investment industry will require a “collective shift” in how it measures value and operates, Geremia says, to the game to another level.
“Investors and our investable markets count on us to recognize misalignments and to change, clear artificial barriers that hold us back from putting their money to work responsibly.”