Editorial: With difficulty
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The last two centuries have seen biology transformed by Darwin, psychology by Freud and economics by Keynes. Have we yet seen investment management transformed by Markowitz? It is true that significant slices of national and international equity portfolios are currently index matched, and that many of the attributes of modern portfolio theory are applied to portfolio construction and monitoring, notably various kinds of risk analysis. But these developments are no more than a part of the investment management profession, and the scientific theories which have been developed are not pervasive in their effect on the way in which portfolio management is addressed. And indeed they should be pervasive, in that the larger shares in the larger markets — by capitalisation, the vast majority of equity investments in the world — are efficiently priced. However efficiency may be defined, and whatever the correct analysis of risk, and whatever degrees of inefficiency may exist, especially in smaller markets or in smaller shares, the whole investment problem should now be looked at in the light of modern portfolio theory. The techniques of this approach should not be referred to as obtuse, peculiar and mathematical: one might just as well say that the details of a heart operation are too obtuse to be given real credibility. Judgmental fund management should be seen as a sub-theorem of overall efficiency, not as a route in itself. And yet this is not the case. It has
䉷 Henry Stewart Publications 1470-8272 (2000)
been said that the only believers in the inefficiency of markets are Fidel Castro, North Korea and judgmental fund managers. In what other field as important as ours could it be said by a senior investment professional that he ‘did not believe in the efficient market theory’? Such obscurantism should not be admitted. The evidence for the substantial efficiency of the major shares in the major markets is now overwhelming both in the discrete manifestations of efficiency in particular situations and in the overall inability of active fund managers to maintain a consistent above-average performance. Why is the past performance of funds no guide to future performance, as publicly recognised by the Financial Services Authority? The very fact that it is difficult to distinguish between luck and skill is an indicator of significant efficiency. To persist in employing judgmental management as a separate discipline is not, in view of the evidence now available, intellectually respectable. And since the vast majority of those concerned are in a position of responsibility in the management of other people’s money, it is not respectable on a moral or professional basis either. What was acceptable in the 1970s or even the 1980s should not be acceptable now, 40 years after the academic evidence appeared and after so much further evidence has accumulated in so many markets. It must be admitted that external forces are not very conducive to a
Vol. 1, 2, 117–118
Journal of Asset Management
117
Editorial
correct approach to this m
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