INVESTMENT WORLD AND REFLECTIONS FOR THE INVESTMENT MANAGER

As more investment managers adopt the quantitative investment management process, a historically effective discipline would not be enough. The investment manager would require a disciplined process that is superior to other investment approaches including the quantitative one. There lies today’s challenge,  it is not enough to be different but to be better different.

Over the years the role of the sponsor/owner has also undergone a change. In the 1950s they preferred the role of the passive outsider. In the 1960s, there was growing interest, due to a growing asset base. In the 1970s, there was a building of management staff, increased importance of performance, vast unfunded liabilities, complex choices and a growing awareness of the asset/liability mismatch. In the 1980s, there was a crisis of complexity, too many choices and too few tools to work at the choices. In the 1990s, there was a clear perspective of the asset/liability mismatch and there was use of tools to control the aggregate character of portfolio plans.

Alongside there was also an evolution in the role and functioning of the fund manager. In the 1950s, the manager was a bond manager with a role to act as a buffer between the sponsor and the uncertainties of the capital markets. In the 1960s, the sponsors/owners themselves became interested in stocks and the balanced manager came into existence. In the 1970s, there was a growing dissatisfaction with the balanced portfolio and the index funds came into existence. There was this specialized manager hawking specialized products and an emergence of passive management. Further there was growing interest in covariance assets independent of the capital markets, like real estate, overseas investments, venture capital, art, rare coins, etc. Thus reducing the portfolio risk without reducing the expected return. In fact in this case the investor finds the return increased at any given level of risk. In the 1980s, there was a glut of choices in product forms, management style and strategies. In the 1990s, tools for sponsors were available. Active or passive portfolios, rebalancing, asset allocation, amongst others.

Similarly, investment theory also moved ahead in new areas. In the 1950s, there was a general awareness of the linkage between risk and reward. In the 1960s, there was the emergence of theories like CAPM and the Dividend Discount Model. At this point theory was not backed with money, the models were mainly academic. In the 1970s, the theory of the 1960s gained currency and acceptance and managers began using these tools. In the 1980s, the managers were faced with many choices. Unfortunately the tools were not available as yet to control these portfolios under management.

Quantitative theory also evolved over the years. In the 1950s, there was none. In the 1960s, came the beta, alpha, Dividend Discount Model, etc as theory. In the 1970s, the theory was applied. In the 1980s, we had the multivariate issue selection, multivariate risk measurement, reshaping return distribution, portfolio insurance, asset allocation disciplines, etc. In the 1990s, we saw the unified pricing model, long term model, short term model, etc.

Today, we have bond managers, stock managers, international managers, alternative and synthetic asset managers, venture capital managers, real estate managers, etc. Further, there has been a rapid increase in sophistication of quantitative theory and a shortening of time between development and application of theory into practice.