As president of the $US557 billion mutual fund giant MFS Investment Management, it’s not hard to imagine that Carol Geremia spent her week glued to a screen watching Wall Street gyrate between the hope of bear market rally and the crushing despair thatBut her reaction to a wild week will surprise you.
But Geremia’s bigger point is that a reversion to more normal economic conditions – higher interest rates, lower profit margins, a world where financial markets don’t move up and to the right eternally – is no bad thing.“Ultimately, I think it’s all healthy. I’m not somebody that can make a market call, but when you look at where we are and how much risk we’ve all had to take, investors are coming back to reality in a better balance.
“Think about it. No interest rates. So anyone who’s 40 years old has no experience of markets. Zero. They don’t know what the time-value of money is. The Fed overshot by lowering interest rates too much … with zero interest rates you are hurting the economy. You are creating bubbles. You are creating tumours like bitcoin. Or hedge that should not exist, but have for 15 years.
“We have a tendency to measure over shorter periods of time because you think that’s a way to control the risk. But it isn’t at all. Part of reducing risk is that you’re committing capital long enough for good things to take place.”Secondly, she questions whether the standard practice of measuring alpha by using “a benchmark that’s not a fiduciary and doesn’t really care about anything” is really the best way of thinking about the long-term stewardship of other people’s money.
Geremia happily concedes she’s not entirely sure what those other ways to define alpha look like, and says the funds management sector needs to work through this challenge. So-called balanced scorecard approaches or 3D investing get part of the way there, but a broader definition of alpha will not be an easy sell in a world focused on short-term returns.
“Good active managers will find a good niche for themselves to support investors through these troubled times. Passive is cheap, but you’re just going along with the money.”