Checking Assumptions and Challenging Mindsets: A Crucial Investment Strategy

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Six years after the 2008 global financial crisis, have the attitudes and fascinations of the finance sector changed? Financial scandals involving foreign exchange and Libor rates are fresh in UK memory, and a growing number of politicians and business leaders are voicing increasingly nationalistic concerns, with a near tangible disconnect between “finance types” and the man on the street. At first glance, few lessons seem to have been learned.

But scratch the surface, and faint glimmers of hope appear.

When she delivered the Richard Dimbleby Lecture in London earlier this year, IMF director Christine Lagarde invited a gathering of business leaders to examine the previous century for clear lessons and warning signs that could serve us well today. Lagarde checked her audience’s assumptions by reminding them that prior to 1914, much of the world had enjoyed long years of peace and incredible scientific and technological progress. However, unresolved tensions between nations, an unfamiliar shift in the balance of power, and a rapid rise in inequality led to upheavals that played out over more than 30 years, across two world wars and a great depression.

Lagarde suggested that just as 20th century turmoil set the stage for the Bretton Woods conference, which she considers to be the original multilateral movement, the aftermath of the 2008 financial crisis provides opportunities for our interconnected economies to serve a global society vastly different than any we have seen before. In order to do so, we must challenge the prevailing mindset — our natural tendency to revert to type and carry on unchanged.

Mark Carney, Governor of the Bank of England, expressed similar sentiments in his address on inclusive capitalism (.PDF), noting that “to maintain the balance of an inclusive social contract, it is necessary to recognise the importance of values and beliefs in economic life.” Carney challenged market participants to break down the private walls we construct to manage our lives where “home is distinct from work, ethics from law, the individual from the system.” In their remarks, both Carney and Lagarde highlight the importance of checking the assumptions that led us into the financial crisis.

Can finance professionals heed the warnings?

Robert W. Jenkins, FSIP, recently pointed out that regulators have, thus far, failed to tackle the issue of leverage in investment banking— current rules allow bank balance sheets to rise to 33 times their equity, where a 3% drop in bank asset values could wipe out 100% of capital. Under those same rules, just a 1% decrease in asset values would leave an institution geared 50 times. Hardly an example of a post-2008 changed mindset, especially when some bank balance sheets are equal in size to their home nation’s GDP.

Yet, as Jenkins points out, it is not too late for investment managers to act. CFA Institute’s Future of Finance initiative is encouraging efforts to shape the financial sector of tomorrow, showcasing behavior and practices worthy of replication. Such initiatives help investors consider how they do business, even as global economic and geopolitical developments continue to present challenges and opportunities on what investment firms do, in every area of their investment strategies.

If we truly aim to serve clients and our societies to the full, with the confidence to deploy innovative strategies in the face of “conventional wisdom,” then prudence guides us to seek wise counsel, gather data and — crucially — check the assumptions and challenge the mindsets we instinctively rely on.

At the 2014 European Investment Conference in London this October, forward thinking investors from across Europe and some of the industry’s sharpest minds will unpack key issues, such as geopolitics, demographics, and innovation for the future. Balancing world class thought leadership with detailed technical learning, the conference also offers technical workshops with practical tools and insights to take back to the office. With such a diverse range of views and such interesting times ahead, the stage is set for the most engaging and productive European Investment Conference to date.

Agents of change who want to prepare to run against the crowd— refraining from recklessness, but willing to challenge “common” sense— should attend the European Investment Conference to gain a fresh perspective on today’s investment climate, positioning themselves to identify opportunities others may miss.

You can register to attend the event, and join us in London to check assumptions, challenge mindsets, and develop an investment strategy suited to the challenges and opportunities that will reveal themselves in the years ahead. You can also subscribe to the European Investment Conference blog to receive updates as they are published.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: ©iStockphoto.com/Retrorocket

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