behavioural finance

Investors spend too much time trying to predict the future, using history as their guide. Instead, they should focus on what is actually happening in the world, and think differently about portfolio construction. Much of current economic and markets thinking is rooted in the post-Global Financial Crisis era. Practitioners need to let go of that history and instead embrace the fact that four trends – weak population growth, deglobalisation, the end of "free money", and the decoupling of asset prices from economies – are fundamentally changing the long-term outlook for markets. - Wayne Fitzgibbon, CAS Market Insights on Portfolio Construction Forum

This week, Kelly Shue, Professor of Finance at Yale School of Management, joins the podcast.  Earlier this year, Professor Shue and her co-author, Professor Samuel M. Hartzmark, published “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms.”  Their research paper concludes that the sustainable investing practice of divesting high-emitting companies (referred to as “brown” firms) in favor of low-emitting companies (referred to as “green” firms) is counterproductive to reducing greenhouse gas emissions.

Here are some of the questions that Peter and Jackie ask Professor Shue: Why did you conclude that the sustainable investing practice of divesting away from high-carbon companies towards low-carbon ones is counterproductive? What are some examples of “brown” and “green” companies?  What are the shortcomings of measuring the percentage GHG emission reduction of a company, as opposed to absolute reductions? Were you surprised to learn that oil, gas, and energy-producing firms are key innovators in the United States’ green patent landscape? What are your thoughts on the anti-ESG movement, where some US states are asking their pension funds to divest ESG-orientated companies? Do you think institutional investors, who have made hard goals around reducing their financed emissions, should consider changing these goals? What are the shortcomings in using the company-level ESG ratings provided by firms such as Sustainalytics, MSCI, and Bloomberg to identify green companies?

Other content referenced in this podcast:

-   Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms (2023) 

-  The ESG-Innovation Disconnect: Evidence from Green Patenting (2021) 

-  Yale Insights: Green Investing Could Push Polluters to Emit More Greenhouse Gases (2023) 

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Jurgen Vandenbroucke, Managing Director, everyoneINVESTED 

Digitisation is not a goal in itself, but a means to reach potential investors. Digitising the sales process won’t magically bring more customers into a bank’s investment solutions – investment is an emotional process, and you need to engage properly with consumers in order to help turn their savings into investments. In other words, acknowledge their fear of losing money, address it properly and boost customer loyalty.

All relationships are built on trust, which requires integrity, competence and doing the right thing. But to earn justified trust from clients and deliver consistently good outcomes for them, year after year, requires practices and procedures that go beyond compliance obligations to globally recognised fiduciary standards of care.  - Aaron Drew, MyFiduciary. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

...though not unconditionally. Behavioural scientists have long embraced the view that emotions are not only unnecessary but disruptive. Yet the nascent field of Neurofinance, which studies how the brain perceives and reacts to financial risks, suggests that emotion is central to rational decision-making, and investors attuned to their emotions can make better decisions during critical market events. At the same time, 'too much' emotion can lead to financial mistakes caused by panic and irrational exuberance. The challenge, therefore, is for investors to learn how to be attuned to their emotional brain without being overwhelmed by it. - Associate Professor Elise Payzan-Le Nestour, UNSW Business School. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

ESG is no longer enjoying its honeymoon. ESG strategies – whatever that means – have underperformed in 2022 and ESG investment is coming under increasing criticism from politicians, regulators, investors and even practitioners. Some of this criticism is valid but at the heart of the problem is uncertainty arising from the widespread use of an acronym with no – or rather many - common meanings. It is right to question ESG practices, but they have merit and will continue to be increasingly important to investors and by extension, the investments and wealth industry. The real problem is the ill-defined use of the acronym itself and we will all be better off if we stop using it. - Tom King, OAM, Nanuk Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

Alternatives should be in every diversified portfolio. Private Equity delivers unmistakable benefits and growth potential, especially in uncertain markets. Unlisted assets, with their proven long-term performance, provide access to a bigger opportunity set that reflects active management in its truest form. Investment into private markets gives managers greater control and influence to transform underperforming businesses. Possibly also influenced by market uncertainty, many businesses are staying private for longer, opening great opportunity for investment managers to continue to diversify their multi asset portfolios with rich investments across many diverse industries. - Dan Farmer, Insignia Financial. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

In research undertaken in partnership with National Seniors Australia, Australian seniors told us that they were feeling the impact of inflation on their lifestyle in retirement. They were concerned about the cost of living and outliving their savings. They want regular income that increases with the cost of living and lasts a lifetime, with access to capital when required. I believe that a partial allocation of retirement savings to a contemporary lifetime income stream can help increase the certainty of delivering what clients want. Such an allocation can deliver more income and with increased certainty. And, contrary to common opinion, such an allocation can help clients preserve assets. - Andrew Lowe, Challenger. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

One of the main goals of investing is to provide for income in retirement – spending! A critical part of any retirement plan is a spending plan (which is not the same as a budget!), that sets out how much money can be safely spent each year, and how this amount may vary depending on changing circumstances and changing market returns. Ultimately, a good spending plan helps keep clients’ investments on track. - Tim Farrelly, farrelly's Investment Strategy. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

As Australians approach retirement, there can often be a sense of trepidation about what lies ahead. And, for a significant proportion of Australians, retirement comes unexpectedly early which can be a cause of considerable angst. Our research shows that those who plan ahead and expect the unexpected retain a greater sense of control and have much less of an emotional roller coaster as they move through their retirement journey. We can help retirees build and retain their sense of control by keeping on building trust and educating them, modelling possible outcomes and demonstrating a planned approach – including providing a Plan B. - Richard Dinham, Fidelity International. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

The best investment opportunities exploit uncertainty. These are found by exploring setbacks and change. However, conventional investment training is number-centric, while I argue investing is all about people. Investors must understand companies and their customers and competitors, the motivations of other investors and, importantly, themselves. Empathy is key, yet industry convention emphasises modelling skills and cultivates auras of certainty. To better develop the skills required to analyse corporates, one can start with individuals as case studies and scale from there. If analysts can't do that, it's unlikely they can address more complex situations. - Douglas Isles, Platinum Asset Management. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

The energy transition represents the greatest economic opportunity since the industrial revolution from 1760 to 1840. Reliably capturing the potential of this opportunity and delivering tangible environmental impact will require investors to assume a posture shaped by three core beliefs: that their legacy ought to be a net-zero world, not just a net-zero portfolio; that they should seek economic leverage, rather than exposure, to the energy transition; and, that they should pursue value accretion in their portfolio rather than growth. - David Costello, Magellan Financial Group. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

Traditionally, investors' access to Commercial Real Estate (CRE) Debt has been limited. However, the rapidly growing activities of Non-bank Lenders (NBLs) have enabled private investors to access this $400bn asset class, offering a broader range of investment philosophies and generating institutional grade investment opportunities. CRE Debt provides dependable returns, backed by real property first mortgages. On a risk-adjusted return basis, every balanced portfolio should include an allocation into CRE debt. - Patrick Keenan, Pallas Capital. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

Investors today have more knowledge than any prior generation, however there remains a chasm between knowing and doing. Our behavioural biases hold us back. Thanks to 50 years of research, we also know in theory how to control our biases. Yet still we fail. No matter how much economies, markets and technologies change, human biases and the difficulty overcoming them remain. Acknowledging we are all biased, because we are all human, is the first step to better decisions. Being mindful of uncertainty, over-confidence, incorrect beliefs, unchecked errors, and the personal risk we face when trying to differ from the crowd are just a few of many steps we can take on the path to more sustainable behavioural alpha. - Longwave Capital's David Wanis. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

As the world gets increasingly complex and uncertain, creating a sense of confidence in a sea of confusion is key to success. By taking three tools of persuasion – act, think big and symbols – and turning them on ourselves, we can create a sense of certainty, even when who knows what is just around the corner. - Watch Thinkerbell's Adam Ferrier and earn 0.50 CE/CPD hrs on Portfolio Construction Forum

It stands to reason that an investor who makes profitable (relative or absolute) decisions more than 50% of the time, and whose profitable decisions typically add more value than their unprofitable ones destroy, will outperform an investor who does not. Decision attribution analysis provides a crucial lens on equity manager skill, benefiting asset owners and fund buyers as they select and monitor managers. In addition, fund managers increasingly use such analysis to identify and overcome their own behavioural biases, producing better outcomes for investors. - Watch Essentia Analytics' Clare Flynn Levy and earn 0.50 CE/CPD hrs on Portfolio Construction Forum

After a lost decade, cyclical and structural headwinds are abating for emerging market equities, while profound secular changes are becoming tailwinds. But the path ahead will look very different to the past, as emerging markets undergo rapid social and structural transformation, accelerated by the Covid-19 pandemic. In times of complexity and ambiguity, investors should avoid the risk of betting on yesterday's winners. The real opportunity lies in taking a fresh approach to identifying, understanding and investing in upcoming trends that will shape emerging markets, some of which will even influence the developed world. - Watch Tassos Stassopoulos, Trinetra Investment Management and earn 0.50 CE/CPD hrs on Portfolio Construction Forum

In an AI world, semiconductors are the new oil
Episode Description = While ChatGPT has brought AI into the mainstream, this fourth generation of computing started accelerating years before. Global demand for greater computing power continues to escalate, presenting an exciting silver lining of possibilities and investment potential, where gigantic volumes of Cloud-based real time data are generated and manipulated from virtually unlimited connectivity, from traffic lights to fridges to ChatGPT responses. The brewing VUCA sandstorm of semiconductor demand will create a handful of investment champions and shape global politics for years to come. - Watch Munro Partners' Nick Griffin and earn 0.50 CE/CPD hrs on Portfolio Construction Forum

As more and more companies are choosing to remain private for longer, the Private Equity (PE) opportunity can no longer be ignored. In an increasingly VUCA world, PE remains a sustainable source of alpha, still able to access proprietary deals leveraging asymmetric information, at a time when public markets have become a technological and AI-driven arms race to rapidly process near perfect information availability. The opportunity cost of not being invested in PE is too high. Its inclusion as an alternative asset in portfolios is an out-of-date approach that does not consider secular trends in companies staying private and the unfolding democratisation of PE. - Watch MLC Asset Manaegment's David Chan and earn 0.50 CE/CPD hrs on Portfolio Construction Forum

 In the Great Panic of early 2020, normal life was replaced by a new society, managed by a medical/ruling elite that promised but failed to deliver virus mitigation. In Australia, rules that were sold to us as “for the greater good” in fact delivered horrific losses that will cripple us for a generation. Yet the upheavals of the past three years were powered by tensions that pre-date Covid-19, including declining living standards and rising pessimism. As economies continue to recover from the catastrophe of Covid-19 lockdowns, we must re-embrace the pursuit of progress, an idea that is central to science, freedom, and a thriving society. - Watch UNSW's Professor Gigi Foster and earn 0.25 CE/CPD hrs on Portfolio Construction Forum