Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
AIMA into bat for bigger, deeper capital markets
(Pictured: Paul Chadwick)
AIMA Australia has distributed a timely paper on the link between the growth in capital markets and economic growth. It’s timely because of the Murray Inquiry into the Financial System, for which submissions close on March 31. But it’s not universally accepted.
AIMA, the global alternative investment management association, says there is a real link between the depth of capital markets and long-term real GDP growth rates.
“Capital markets support economic growth by providing new sources of funding for long-term investment and facilitating improvements in corporate governance,” the paper says. “Activities by pension funds, non-bank lenders and active investors such as hedge funds grow the real economy. Capital markets comprise stock and bond markets and capital markets activity includes both debt and equity financing.”
Paul Chadwick, the chair of AIMA Australia, said last week that, although the paper used European Union examples, it showed how governments globally could benefit from a well-developed capital markets policy.
He said: “There could be considerable economic benefits to Australia from growing the country’s capital markets, stimulating demand for pension funds and other investment products that benefit greatly from deeper capital markets, and promoting the growth of Australia as an international asset management centre.”
However, academics and funds managers linked to the University of Technology Sydney’s Paul Woolley Centre, Ron Bird and Jack Gray, have argued publicly for some time that valuable societal resources tend to be sucked up by enlarged capital markets.
During market booms, for instance, resources get drained off into wasteful areas, such as during the tech bubble, which end in devastating busts. In those conditions financial services will attract a nation’s best brains who would have been better deployed in areas such as medicine or engineering.
Bird and Gray are expected to submit a paper on the topic to the Murray inquiry.
The AIMA paper: Capital Markets and Economic Growth – Long-Term Trends and Policy Challenges’, by Christoph Kaserer and Marc Steffen Rapp. To download a copy, click here: http://www.aima.org/download.cfm/docid/5D6152C4-C9A0-4FDA-B2DD415168ED658B
To download an AIMA position paper on the research, click here: http://www.aima.org/download.cfm/docid/7E7766E3-A0FA-4C21-A471A21E879EEA9D
