Anthony Hilton: Investment shouldn’t just be about profit

Now think about all those funds that boast in advertisements of their skill in asset allocation. In what way are they different, other than in charging a lot more than the cost of sticking in a pin? Most of modern investment is gambling — managers even talk about placing bets — because that is where logic leads if you posit that investment is only about wealth creation.

The problem arises because finance theory has got too close to economics and been tainted by the inadequacies of that discipline.

Having started off as a philosophy — Adam Smith’s Wealth of Nations was written in the context of his philosophical work, The Theory of Moral Sentiments — economics has in recent times abandoned its roots and gone in pursuit of rules and certainties, so it can call itself a science.

Thus the Milton Friedman theory that making as much profit within the law is the sole purpose of a business run by rational people leads directly to the rational investor seeing the sole purpose of investment as being to maximise returns within the law.

These thoughts are drawn from a recent paper by Saker Nusseibeh, the head of fund management group Hermes, who argues that there needs to be more to investment than simple wealth creation.

The paper — published on the website of the 300 Club, an association of asset managers and owners — laments that all the debates in the asset management industry are around the question of “how” to get the best returns — by geographical spread, by growth versus value, high cost or low cost, bonds against equities — and what products will best deliver these outcomes.

What the industry needs to do instead, he says, is ask itself the questions: “Why? What is the purpose of investment? What do we want our money to do? Who do we want to benefit? What sort of society do we want to create?”

The asset management industry needs a reason for being that defines its place in society because without this wider purpose, it is pure gambling. All the stuff about passive investing, high-frequency trading and exchange traded funds, derivatives and so on is simply a directional bet on the market.

To Saker, the solution is engagement — but not simply engagement to gee up management, so it delivers a bit more profit. Rather, engagement is the way people regain control of their lives. The people are the ultimate owners of the shares, and this ownership needs to be harnessed and redefined as the way in which ordinary people control the companies which determine their economic and social destiny.

“We as citizens and investors shape the society we live in. The $75 trillion of savers’ capital in the world is not separate from the economic and social fabric we live in; it is instead not only an intrinsic part but the means to control it,” Saker says.

Investments should be judged by their holistic, not financial, returns. Here the value of an investment is measured by its impact on the whole society — the jobs it creates, the environmental impact, the benefit to the community where it is based, the value to customers and suppliers, the amount of tax paid — not just the profit to shareholders.

This would also have implications for when companies receive takeover bids — the decision to accept or reject is then not just about price but also takes into account the long-term impact on communities if they stand to lose head offices, research centres and jobs; customers if they lose choice; and the tax take — if, as usually happens, the new owner shifts profits off shore. This recognises that the business is an asset for the whole of society and the country.

This is very much the defence in the face of an unwanted bid being mounted at this very moment by Dutch group AkzoNobel.

Interestingly, fund managers at Elliott, Columbia Threadneedle and Henderson were moved to express their disgust in print last week because they think the management should be focused on price, not on the secondary and tertiary effects on society.

Saker sees this as a way of saving capitalism from the self-perpetuating, self-regarding and self-rewarding machine it has become.

It is a mechanism for the people to take back control. Ownership and engagement should be a machine for people to exercise their democratic will to direct the economic machine in a way that serves them collectively as well and individually.

That should be why they invest.