Economy and Society | CFA UK

Tuesday 29 March 2016

"It is important that we act as effective stewards’ of our clients’ capital, enabling it to support growth"

 

The investment profession has always had a significant role in financing the economy, but our contribution to the economy and society sometimes goes unrecognised. We need to do more to explain our role and the value that the profession delivers.

Following the financial crisis, banks have stepped back from some of their financing function because of capital constraints. The investment profession has stepped up to fill the gap. Financing the social housing market is an obvious example. Reduced dependence on the banking system has some advantages. Risk is now more widely spread and located with parties that are less levered than the banking system and unlikely to require taxpayer funded bail-outs.

Looking back, the bursting of the dot-com bubble and the US housing bubble both destroyed similar amounts of wealth (US$6 trillion), but losses from the dot-com crash were absorbed by equity investors with the capacity for loss, whereas the losses from the US housing bubble hit banks that were ill-equipped to take those losses against their limited equity capital. The effects of the banking crisis have been much deeper and longer lasting.

The investment profession’s influence over capital allocation and capital stewardship is already significant, but is likely to grow over the coming years. It is important that we are conscious of that responsibility and that we act as good and effective stewards of our clients’ capital, enabling it to support growth and generate an appropriate return for its ultimate providers.