Investment Management: Meeting the Noble Challenges of Funding Pensions, Deficits, and Growth


Today's investment professional faces the formidable challenge offunding the retirement of millions of workers as well as meetingthe capital formation needs that sustain businesses around theworld. During these extremely volatile times, the rate at whichchanges are occurring in areas directly impacting the practice ofinvesting has forced individuals in this field to "think abouttheir thinking" and reexamine some of their long-standingassumptions.

Wayne Wagner—a leading financial...

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Today's investment professional faces the formidable challenge offunding the retirement of millions of workers as well as meetingthe capital formation needs that sustain businesses around theworld. During these extremely volatile times, the rate at whichchanges are occurring in areas directly impacting the practice ofinvesting has forced individuals in this field to "think abouttheir thinking" and reexamine some of their long-standingassumptions.

Wayne Wagner—a leading financial thinker whose work oninvestment management efficiency has saved investorsbillions of dollars—and Ralph Rieves—anexperienced financial editor and advisor, who's worked with some ofthe best minds in the business—understand the issuesaffecting investment managers, fiduciaries, trustees, andregulators striving to meet the challenges of funding pensions,deficits, and growth. Now, with Investment Management,Wagner and Rieves address these issues through the contributions ofacknowledged authorities from various investment managementcompanies, consulting firms, professional associations, anduniversities.

Current turmoil in the capital markets has made global financialstewardship a difficult endeavor, but by facing reality, focusingon clients, and reexamining assumptions, you can continue tosucceed, and Investment Management will show you how.Divided into six comprehensive parts—with contributions froma roster of top professionals and academics including PeterBernstein, Richard Bookstaber, Robert Jaeger, Arnold Wood, andFrancis Gupta, among others—this well-rounded resource:

Part I explores the turbulence and changes within theindustry, and suggests what it might take to fulfill yourinvestment obligations moving forward

Part II details some attitudinal challenges that thefinancial world will always face

Part III addresses the "town and gown" aspects of theinvestment process through discussions of theory and practice

Part IV offers insights on client-side challenges andprovides professionals with a better understanding of what thebusiness is all about

Part V describes the transactional aspects of portfoliomanagement—from understanding the technology to executingcost-effective trades

Part VI focuses on the attributes and characteristicsnecessary to sustain the growth of a firm—from substantiatingpolicy and building a professional team to utilizing emergingtechnology

As a professional in the investment industry—and stewardof the world's assets—you need to adjust accordingly tochanging markets, as well as reassess the way you manage money.Investment Management will put you in a better position todo this, and much more, as it offers practical guidance onnavigating an ever-evolving financial landscape.

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Product Details

  • ISBN-13: 9780470455944
  • Publisher: Wiley
  • Publication date: 8/10/2009
  • Series: Wiley Finance Series, #518
  • Edition number: 1
  • Pages: 450
  • Product dimensions: 6.40 (w) x 9.10 (h) x 1.50 (d)

Meet the Author

Wayne H. Wagner is the founding and lead principal of OMNIand a founding principal of Wilshire Associates. He is known forhis pioneering work in designing balancing algorithms for theworld's first operational index fund, and later developed methodsto deal with the hidden delay and opportunity costs of trading.Wagner has authored, coauthored, or edited many books and articles,and is a frequent writer and speaker on investment management andfiduciary duties. He holds two Graham and Dodd Awards from theFinancial Analysts Journal for excellence in financialwriting.

Ralph A. Rieves is the managing director of FarragutJones & Lawrence. He was the first editorial director of theDow Jones-Irwin imprint and was one of the founding editors of theJournal of Investment Consulting. He is a recipient of thebook industry's Bowker LMP Award for editorial achievement.

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Table of Contents




Editorial Advisory Board.

Introduction: A Sea of Changes and Waves of Opportunity(Jacqueline Charnley and ChristineRøstvold).

The 2008-2009 credit crisis roiled the already-turbulentenvironment in which asset managers confronted their stewardshipchallenges. The authors cite seven major elements of the“pre-crisis” turbulence, and remind readers of Darwin'sdictum of survival. Proactive relationships with all the playersare the key.

PART ONE: The Challenges of Changes and Crises.

Chapter 1 The Discontinuity Challenge (Wayne H.Wagner).

The twists and tangles of the 2008-2009 credit crunch will longbe remembered. This chapter does not address that specificdiscontinuity, but discusses discontinuities in general.  Froma longer time perspective, we see that these discontinuities occurfrequently, suggesting that in addition to applying our experienceand running our models in “normal” times, we need toprepare to face the inevitable discontinuity environments. This isthe first chapter of several in which we reflect on Taleb'sBlack Swan.

Chapter 2 The Sub-Prime Crisis as a “PredictableSurprise” Strategic Lessons to Be Learned (KeithAmbachtsheer).

The fallout from the events of 2008–2009 has engenderedseveral million words of criticism, constructive and otherwise.Yet, very little relevant appraisal has come from the investmentmanagement industry. An enduring champion of pension reformdescribes the collective actions that can be effectively marshaledwhen confronted with another threat of asset erosion. Why, inthis care, Bazerman and Watkins are more relevant thanTaleb.

Chapter 3 The Solidarity Challenge (David G.Tittsworth, Esq.).

Compared to many other laws, the statutory framework of theInvestment Advisors Act of 1940 is relatively simple andstraightforward. The fiduciary culture it has fostereddistinguishes the advisory profession from other financialservices. Now, the basic legal and regulatory structure that hasgoverned investment advisors for decades is being debated. Well-organized and well-financed groups seek to change the lawsbased on the 1940 Act., charging that they are“outdated” and “losing relevance”. Theauthor suggests three actions to ensure that investment adviserswork together to preserve what is good about how the advisoryprofession is governed.

PART TWO: Keeping the Challenges in Perspective.

Chapter 4 The Failure of Invariance (Peter L.Bernstein).

When published in 1996, Against the Gods: The RemarkableStory of Risk took its place as one of the seminal historybooks written in the twentieth century.  Here is Chapter 16from that remarkable work.  Many readers encountered for thefirst time Kahneman’s and Tversky's “ProspectTheory”. Investment managers who have not read Against theGods are at a competitive disadvantage—big time.

Chapter 5 Inverted Reasoning and Its Consequences(G.C. Seldon).

Not for the first time, we anthologize this excerpt fromPsychology of the Stock Market, first published in1912.  Sage observations from which the author observes“Historical parallels are likely to be misleading.”

Chapter 6 Fatal Attractions for Money Managers (ArnoldS. Wood).

An experienced and innovative investment manager reflects on“the triumph of temptation over reason”, and offers a“list of ten causes of irrational, and occasionally bizarre,behavior” by professional investors.

Chapter 7 Renzo Gracie's Brazilian Jiu Jitsu Academy(Richard Bookstaber, PhD).

An elegant analogy illustrating how innovation, endogenousrisks, and regulation should be contemplated so as to assure amarket “that is more robust and survivable”. Excerptedfrom the best-selling A Demon of Our Own Design Hoboken:(Wiley, 2007).

Chapter 8 Managing Outside the Box (Robert A. Jaeger,Ph.D.).

This reflection on fads and fashion in the investment businessprovides an appropriate departure for studying Part three of thisbook: The Challenges Under Transformation.

PART THREE: The Challenges Under Transformation.

Chapter 9 The Evolving Challenges of Quantitative Investing(Robert L. Hagin, PhD and Kathleen T.DeRose).

The authors suggest that the rapid pace of technological changeaffects both fundamental and quantitative investors. Despite theirsimilarities, quantitative investors, particularly those whoacknowledge the limits of technology, are better equipped todeliver on their clients' performance expectations. As investmentapproaches begin to incorporate insights from beyond computerscience, drawing from biology and other disciplines, the debatebecomes a philosophical one about the frontier between the computerand the intellect.

Chapter 10 EMH and the Matter at Hand (Wayne H. Wagnerand Ralph A. Rieves).

Do nanosecond changes in “publicly availableinformation” and the behavioral school's challenge require areappraisal of a fundamental postulate of investment theory? Why isTaleb relevant?

Chapter 11 The Attribution Challenge (RonSurz).

Performance standards focus on accurate measurements andreporting. But the most accurate measurements can be misinterpretedwhen compared to faulty benchmarks. Here is an extensive discussionabout accurate benchmarking and rigorous attribution analysis.Tiger Wood's bowling scores are not relevant to hisachievements.

Chapter 12 The Academic Challenge An Interview with ProfessorStephen Brown on Developments in Modern Finance (HarryLiem).

Some of the great questions of financial theory remain withus.  A respected academic candidly answers some well-posedquestions about “book-smart” and“street-smart”. The answers are relevant and pertinent,regardless of occasional systemic disorder.

Chapter 13 The Elusiveness of Investment Skill (RobertA. Jaeger, PhD).

The author of this chapter turns from commenting on fads andfashions to reflecting on investment skill. Skill is elusive, butit is not illusionary. He argues that skill is real preciselybecause it is elusive. “The barriers to entry in the hedgefund business are seductively low; the barriers to success areformidably high.”

PART FOUR: The Clients’ Challenges.

Chapter 14 The Client Challenge —Trustees as Leaders(Fiduciary 360).

Recent events have generated a new challenge for trustees. How boards are lead has emerged as an even more critical issue thanit has been. The authors remind stewards of the fourcharacteristics of a prudent procedure for discharging fiduciaryduties: organize, formalize, implement, and monitor.

Chapter 15 The Kool-Aid® Quandary and theEnduring Lure of Outperformance (Edward Siedle,Esq.).

A seasoned observer of the money management industry remindsreaders about the myth and reality of sustained outperformance.Clients who can't distinguish between myth and reality are morelikely to be subject to chicanery. The burden is on clients to makethat distinction, not on SROs or regulators. This theme isreiterated in several chapters of this book.

Chapter 16 The ESGI (née SRI) Challenge("Dove Green").

The term socially responsible investing (SRI) has morphed intoenvironmental, social, and governance investing (ESGI), and issometime referred to as sustainable investing. Each of these termshas been used by the cadres of activists to describe theirpersuasive campaigns—the targets for which are nowtrustees, investment managers and corporations. Here is adiscussion about the concerns of shareholder activists and socialactivists. Are ESG policies and procedures the new intangibles'Whatever the cause, fiduciary duty still trumps all.

Chapter 17 The Marketing Challenge (RonGold).

Investment managers do not have to differentiate themselves fromthe competition in huge ways. The real marketing challenge is toarticulate in a convincing fashion how the differentiating“accrues to the benefit of the client”. Here are someinsights and proposals for getting more than “just a ticketon the bus”.

Chapter 18 The Selection and Termination of InvestmentManagement Firms by Plan Sponsors (Amit Goyal, PhD andSunil Wahal, PhD, et al.).

We would have liked to have changed the title to 'SuspicionsConfirmed'. This chapter appeared in the August, 2008 issue ofThe Journal of Finance and is reprinted in its entirety,including references and citations. A complete familiarity withthis work is recommended for managers, consultants, and trusteesthroughout the world.

PART FIVE: The Execution Challenges.

Chapter 19 The Market Price Challenge (Francis Gupta,PhD and John A. Prestbo).

Are dark pools the sell side's survival tactic or revenge? Dothe benefits of dark pools' lower trading costs outweigh diminishedtransparency? Over the past 20 years volume on Nasdaq has increasedover 20,000 percent. Could one argue that innovation andadaptability have been achieved at reasonable costs to investorsand beneficiaries?

Chapter 20 The Sell-Side Challenge (SteveWunsch).

Legislated order-handling rules and "shredded" algorithmictrading destroyed the longtime sell-side business model.Investments to enhance technological proficiency devour capital.Buy side firms have more options. Is beefing up proprietary tradingthe best way to survive? Is there any future for the smallersell-side firms? A veteran innovator and successful exchangeofficer reflects on relationships, regulation, and the cost ofdoing business on both sides.

Chapter 21 The Trading Challenge (Wayne H.Wagner).

Our co-editor opines on all the changes and reminds us thattransactional basis points will always impact performance. And theclients know it.

Chapter 22: The Settlement Challenge (Steve Webb andSimon Bennett).

The globalization of asset allocation is just one of severalpressures complicating clearing and settlement processes. Thepressures are significant factors in the buy-side search forfrictionless trades and low transaction costs. Two acknowledgedexperts discuss these factors in the context of driving down thecosts “to the end investor”.

PART SIX: The Challenges to Management.

Chapter 23 Investment Belief Systems: A Cultural Perspective(John R. Minahan, CFA).

Beliefs permeate the investment business. They shape ourdecisions and our institutions. Beliefs themselves are shaped byculture, by professional training, by experience, and by deliberateattempts to clarify ambiguity and reduce uncertainty. In rapidlychanging times, it is valuable to examine one's beliefs in light oftheory, evidence, and alternative points of view.

Chapter 24 Ethical Leadership in the Investment Firm(Jim Ware, CFA, and Jim Dethmer, ThM).

The authors built this chapter by developing the concept ofenergetic integrity, which they describe as the preventive medicineagainst legal and ethical breaches.  They conclude with adescription of the key elements necessary for energeticintegrity.

Chapter 25 The Adaptive Leader (Jim Ware,CFA).

The author suggests asking 14 questions to ascertain theeffectiveness of a firm's leaders. Investment management is atalent business. Bad bosses will drive out good talent.

Chapter 26 The Staffing Challenge (MonikaMüller).

The author identifies seven traits of portfolio managers. She describes a matrix composed of these characteristics, andexplains how its use can enhance the recruitment and retention ofconsistently high performers.  First, however, one shouldreflect on some research.

Chapter 27 The “Same Page” Challenge:Communicating Effectively (Jamie GoodrichZiegler).

A veteran industry executive addresses the necessity of clearcommunications among all the players: consultants, sponsors,sell-siders, and portfolio managers.  Some practicalsuggestions on overcoming barriers and misconceptions.

Chapter 28 The Data Management Challenge (DonDeLoach).

There forever will be challenges to the interdependency andefficiency of information systems. Here are some recommendedapproaches to designing, utilizing, and monitoring the“life'sblood” of the firm.

About the Editors.

About the Contributors.


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