Financial innovation between fundamentals and new rules

Opportunità e rischi per l'investitore di lungo periodo

Last year, on the sea of Antalya, we tried to answer the question whether, in regard to investment policies, we should go back to the past. A year later, we can say that a need for simplicity, transparency and completion of investments has prevailed, but more in the vehicle that in the underlying risk categories: emblematic, in this sense, the evolution of replication products from simple ETF to algorithmic and structured products, and the rapid development of UCITS with underlying hedge strategies.

We meet again in Amsterdam, home of the first stock exchange in history and even today one of the most important centres for the management of institutional assets, to add two more elements to the context of the discussion on the role of financial innovation: the macro and micro-economic fundamentals and the evolution of the regulatory context (at the global, EU and national level).

With regard to the fundamentals, on top of the deleveraging crisis endogenous to the system, we have experienced two major, purely exogenous shocks: a natural catastrophe (the tsunami/earthquake in Japan, with its impact on the chain of production and future energy policies) and a geo-political event (unrest in the Arab world, with consequences not yet clear).

The new discipline concerns, first of all, the banking system, to avoid new bankruptcies which no government could in the near future remedy, but also other financial intermediaries, such as insurance companies, hedge funds, property funds…financial advisers (reception of the MiFID and its ongoing review).

Also the Italian institutional investors are, or will soon be, the object of new regulations, specifically in regard to their investment policies:

  1. the Casse di Previdenza have already been the object of an inter-ministerial Directive, mainly focused on real assets, but with an important provision concerning the integrated management of assets and liabilities (ALM). The trade association (AdEPP) is also working on a draft self-regulation of investment policies, to be presented to the competent Ministries once internal agreement has been reached;
  2. by the end of the year, we should see the consultation on the text of the new Decree of the Minister for the Economy and Finance, which will redefine the restrictions on the investments of supplementary Pension Funds, “shelving“  the outdated Ministerial Decree 703/96 and hopefully granting more freedom of investment, against more adequate organisational controls aimed at measuring and managing the different categories of risk that will be included in the portfolios to increase their diversification.
  3. Foundations are also expected to work on a self-regulation project with regard to investment policies, promoted by their trade association (ACRI) in view of its important anniversary in 2012. This clear reversion to portfolios very focused on the reference bank, often accompanied by a level of financial leverage never reached before, makes desirable a greater uniformity of management and accounting policies, to the advantage of all stakeholders.

Financial innovation, often mentioned as one of the main causes of the financial crisis, has involved not only products but also management strategies and processes, where technology has an increasingly dominant role at the expense of human capital. Trading systems by now predominate on the main financial markets, and quantitative management strategies are prevailing on the discretionary ones.

This context is certainly not congenial to long term investors, who find it increasing difficult to stick to their traditional approach of selecting investments on the basis of fundamentals alone. They see, therefore, in the short term, fewer opportunities and more sacrifices, which hopefully will be repaid in the long term with more sustainable and less volatile real returns.

The programme of the 7th InFormation Course was rather packed.

The opening presentation was as usual Prometeia's and provided participants with discussion topics related to the macroeconomic background and the financial markets. The wide-ranging and stimulating theme of this conference was then discussed by a panel of representatives of the different segments financial sector.

The abstracts of the presentations are, as usual, the content of the special issue of Anteo. For those who took part, they are a useful reminder and for the other loyal readers of our magazine, hopefully, a stimulating analysis.