The Future of Investment Management

Looking at the present and at 35 years in the investment management field has produced the six observations and conjectures in this article: The correct portfolio for any investor is global (with a distinction between currency exposure and asset exposure), and global asset trading will eventually be continuous, 24 hours; “momentum investing” is an oxymoron; the model inputs reflecting our fundamental expectations are often irrational; investment management fees must drop significantly; the lumpiness and discontinuities in the market provide opportunities but frighten most investors; and past investment results are largely random noise with no predictive value. The reflections and conjectures shared in this article are grounded in 35 years of experience in the field of investment management. These thoughts cover roughly six—sometimes related, sometimes not—topics:Globalization of financial markets. Portfolios that span the asset allocation array across all of the global markets have a return–risk relationship that dominates any individual asset class. Globalization raises the need to separate the idea of currency exposure from decisions about a portfolio's asset holdings. Because of globalization, asset markets in the future will transact over 24-hour periods without defined opening and closing prices.The distinction between trading and investing. Trading is focused on short-term price changes that occur for any variety of reasons. Investing is a process focused on future economic cash flows from business activities that ultimately determine the value of an investment.Fundamental expectations. Decision-making models have evolved nicely during the past 35 years, but unfortunately, inputs to the models have not. Careless assumptions have led investors to erroneous conclusions from model outputs. Therefore, in the future, investment analysis needs to become more rigorously grounded.Fees. Measuring the aggregate fees paid by investors as a group against the aggregate value added by their investment managers shows clearly that something is greatly amiss. Therefore, investors will alter their acceptance of fees in the coming years.Lumpiness and discontinuities. Successful investment management that seeks to provide value above appropriate benchmarks is a lumpy and discontinuous process. Managers and clients need to do a much better job in the future of recognizing this characteristic of markets.Random noise. Because investment results are largely random noise with no predictive information, the investment management field should ultimately evolve away from using past performance for anything other than its historical accounting value.In offering these observations to the reader, I am mindful of Oscar Wilde's warning: “Experience is the name everyone gives to their mistakes.” I leave it up to the reader to judge whether my “experience” adds any value.