Magazine Issues » Dec 2017-Jan 2018

OPINION: The year of why

Fiona_RintoulA recent survey from the insurer Axa shows that many Germans believe the stock market is no better than a casino. Fully 58% of the 2,100 German savers interviewed for the survey thought that investing in equities would bring uncontrollable risks into their portfolio, while almost half compared it with a trip to the casino. Are they wrong?

The response from the German fund association, the BVI, is predictable. Analysis shows that the risk of failure (defined as not getting as much money back as you paid in) for an equity savings plan that runs for 25 years is nil, it says. The BVI advises savers who are not confident enough to make their own investments to opt for investment funds: “For one of the strengths of fund managers is that they analyse companies and markets and choose the best equities for the fund.”

Now, is that strictly true? I accept that this is the objective, but survey after survey shows that it is not realised. I give you just one as an aide-mémoire; according to S&P Dow Jones Indices, almost 80% of actively managed global funds benchmarked to the S&P Global 1200 lag their benchmark.

There’s another problem too. What are “the best equities”? The ones that provide the best return? Or the ones that don’t trash the planet? Perhaps we need to look at investment differently if we truly want savers to distinguish it from the throw of a dice in a darkened room.

This tumultuous year is ending as it started with every sensible person asking why. Why president Trump? Why Brexit? Why Alternative für Deutschland? A thought piece from Saker Nusseibeh, CEO of Hermes Investment Management, resent to the market as a Christmas present, says we need to ask the ‘why?’ question of our investments too. Nusseibeh argues that academics and finance practitioners are obsessed with the question ‘how?’ and forget about ‘why?’ Finance sees itself as an extension of economics, and economics is seen as a science rather than part of political philosophy. But, he observes, common sense tells us the laws of physics are constant, observable and universal, and observation tells us the ‘laws’ of economics are not.

“To my mind this argues that we should stop treating economics, and indeed financial theory, as a science and go back to treating it as part of political philosophy,” he writes.

Nusseibeh goes on to argue for a holistic approach to returns that answer the ‘why?’ question. The reason why we invest our savings goes beyond – or certainly should go beyond – the simple quest for the accumulation of wealth.

“We, as citizens, shape the society we live in through our work, our taxes, which finance public policy and through the daily pursuit of our businesses and the way we live our lives,” he writes. “I would contend, therefore, that our savings form part of this open adaptive system.”

The answer to why we invest, he argues, is not just to make money but to shape our social economy. This accords with the Islamic view. In Islamic finance, it is forbidden to make money from money. Money must be productive. Surely that makes perfect sense? Of course, for this approach to resonate with savers, we must invest in a way that shapes our social economy for the better. If our approach falls short of that, we certainly shouldn’t be surprised if savers can’t see the difference between the stock market and a casino.

Fiona Rintoul, editorial director, Funds Europe

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