But that did not matter if economies were growing, since asset prices follow economic growth, albeit with a time lag. This was certainly enough of an argument to persuade hard-headed chief executives to allow their new (and legally required) staff pension funds to be invested in the stockmarket.
Excitement of the future
Suddenly, investment management was not only about the rich, but also the powerful. Asset management became big business – larger and more profitable than banking itself – and many of the simple lessons of the past were forgotten.
One of these was cost: stockmarket returns are low – indeed minute compared with retailing or manufacturing – and high costs, whether fees or dealing, can destroy them utterly.
That did not matter in the early days. Millions were flooding into investment management coffers, the world was recovering from the second world war, globalisation was rebuilding trade to levels not seen since the beginning of the first world war, and stockmarket investment was profitable, both to pension fund beneficiaries and to the middle classes investing in the new unit trusts.
Inflation was a real danger, and a trigger for equity investment. The efficient market hypothesis (EMH) argued in favour of dealing. If no analyst could beat the market, concentrate on the market itself. Price information showed that security prices moved between 30 and 50 per cent a year, so in theory active dealing should capture much of that change.
Sadly, the timing never seemed to work. The reason may be that, as behavioural economists are starting to show, few of us are the emotionless, entirely rational actors that economic theory demands. Or it may be that EMH is right but in an unexpected way – that markets react to our dealing behaviour and not to information about companies. Whatever the reason, this method of investment was costly and a failure.
Clever theories
But EMH also offered other possibilities. Dealing did not work in the context of the overall market, but choosing the right asset allocation might. Defensive and aggressive have always been widely seen as fashionable alternative styles of investment, as were value and growth.
International diversification then offered even greater choice: emerging versus mature, and maybe in future declining or dying for some industries or regions.
But still investors remained dissatisfied with performance, or at least the cost-return ratio.
Now it is smart beta, which, as the FT Lexicon puts it, “is a rather elusive term in modern finance. It lacks a strict definition and is also sometimes known as advanced beta, alternative beta or strategy indices. It can be understood as an umbrella term for rules-based investment strategies that do not use the conventional market cap weights that have been criticised for delivering sub-optimal returns by overweighting overvalued stocks and, conversely, underweighting undervalued ones”.
