CFA Societies are taking the lead in promoting professionalism and ethics, because the fairness and efficiency of financial markets is driven by human behaviour.

OPINION | Fair and effective markets are integral to better investment outcomes.  To keep markets functioning that way, it is important to remember that they are driven by the behaviour of the people who participate in them.

The theme of the CFA Australia Investment Conference 2017, held in Melbourne last month, was Best and Fairest: Integrity and Innovation in Capital Market Structures.

Paul Smith, CFA Institute president and chief executive, highlighted how the CFA Institute and CFA Societies are striving to develop the profession and capital markets in an ethical way for the ultimate benefit of society. As markets are composed of people, integrity in the capital markets comes from those same people, who should be encouraged to participate in an ethical way.

Often the perception is that markets innately respond to data efficiently. This is a flawed view. Markets are driven by the people who participate in them, incorporating their aspirations, fears, preferences and needs.

The degree to which they are ethical combines with their sentiment, emotions and perceptions to drive markets.

Individuals’ impact

The role of individuals in determining market integrity was a theme for many speakers at the CFA conference.

Australian Securities and Investments commissioner Cathie Armour spoke of how the regulatory framework on innovation and technology should help deliver potential benefits to society. When asked whether the regulatory cycle had gone too far, Armour noted that there were still too many court cases pursuing unscrupulous investment scheme operators where mum and dad investors lost money to warrant pulling back on regulation that protects investors.

Former US Federal Reserve governor Randy Kroszner spoke on the role of regulation and the influence of central banks, interest rates and the range of possibilities for the next Fed chair. A key insight was that central banks have not been the only force driving lower interest rates. The timing of the secular decline in global interest rates from the 1980s onwards seems to fit with when China began to engage with the global economy.

Kroszner noted the excess supply of money coming from growing wages, combined with a 40 per cent average savings rate from income in Chinese households. When this effect is amplified in coming years, with the declining spending patterns of a globally ageing population, the effect will be for further downward pressure on long-run interest rates, he suggested.

Kroszner’s rationale makes for a live case study of how large groups of people with different motivations can combine to influence important financial markets.

The profession’s future

Colonial First State Global Asset Management chief executive Mark Lazberger and AustralianSuper chief investment officer Mark Delaney shared their personal insights and concerns for the future of the investment profession. (See “Future under fire”, next page.) Delaney’s concerns included the rise of indexing, robo-advice’s influence on portfolio construction, and the importance of reputation. Lazberger focused on technological innovations, noting the motivations of innovators and the nature of their developments are not always good. Both agreed that improving the diversity of the profession is crucial.

Grant Williams, founder of Real Vision and author of Things that make You Go Hmmm, posed the question ‘What if the aberration of near zero interest rates is the norm?’ Williams went on to compare equity, bond and real-estate markets with total credit growth, velocity of money, and gold. He argued asset prices are “in a world of pure imagination” never seen before when measured by traditional fiat currencies, but perhaps not in terms of real assets, particularly gold.

We must look to the nature of market structures and the level of integrity and distortions that operate on them, to understand how to develop better investment strategies for our ultimate clients and society.

Graeme Bibby is president of the CFA Society of Melbourne and the chief investment officer of Mutual Trust.


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