Investing in a world without risk-free assets

As in June 2008, when we met in Santander, we met last year in Amsterdam for our usual InFormation Course, already concerned but still unaware of how bad the incoming summer would be.

The incoming summer does not look very promising either for institutional investors, first of all, who attended the Budapest conference in record numbers, and also for our friends in Emilia hit by a series of earthquakes. We have dedicated this 8° Course, in solidarity, to them and to the people of Aquila still suffering from the consequences of the 2009 earthquake!

The title of the 2012 conference, chosen as usual in October of the previous year, has inspired many other conferences and articles.  Nowadays, it may seem a bit overused, but that is wrong: nobody has understood the key point that we tried to make through our discussion in Budapest!

Pure market risk today can be eliminated only by accepting a zero short-term yield, in nominal terms, and negative in the medium-long term, in real terms. “This is not a country for investors!”

The reference to the disappearance of the “risk-free asset” of portfolio theory is, therefore, reductive with respect to the overall disappearance of investment categories able to shield investors from the different types of risk that we have discovered during the crisis and now we try somehow to measure: liquidity, credit, counterparty, operational, reputational…

The recent changes in the self/regulation of investment policies and processes, anticipated and discussed last year in Amsterdam and now largely known, explicitly introduce for the first time a factor of risk, both operational and reputational, which Prometeia Advisor has long been flagging to institutional investors, their Trade Associations and Supervisory Authorities: the “financial advisor risk”.

Now specific legal and regulatory references are available:

  1. for social security funds (as currently for this aspect there is no difference in treatment between Pension Funds and Casse di Previdenza), the COVIP resolution of March 16 2012, “Provisions on the execution of investment policies”, for the first time makes reference to advisers in Art. 2 (document on investment policy), as already made in the Law for supplementary social security funds (Legislative Decree 252/05) and therefore referred to in Art. 3 Par. 6. of the document made available for consultation by the Ministry for Economy and Finance, “Draft proposal of ministerial regulations setting criteria and restrictions for the investment of Pension Fund resources and for the discipline of conflicts of interest”. The advisor's activities are regulated by Art. 5 of the COVIP resolution (tasks and responsibility of the persons involved in the investment process), also with reference to the Finance Function and, if consistent with the organisational structure chosen, also by Art. 6 (financial management control system);
  2. for Bank Foundations, the “Foundation Charter”, approved unanimously by the members of ACRI and presented at the celebration of the centenary of the Association, at the beginning of June in Palermo, contains many references to the different external organisations that Foundations may possibly use to implement their investment process. These references are found in the second section (organisational, control and accounting structure) of the “Asset Management” chapter; the implementation provisions, approved by the ACRI Executive Committee on May 30 2012, also contain several explicit references to advisers;
  3. lastly, with reference to the specific Italian regulation for financial advisers, the Ministerial Decree 66/2012 (“Regulations on the capital adequacy and independence requirements for financial advisory firms, as well as on the professionalism, reputation and independence requirements for their representatives”) was published in the Official Gazette on May 29th; this has put an end to the confusing prorogation regime until now granted to companies (SRL and SPA) that claimed to be already operating as financial advisers before the reception of the MiFID in Italy (November 2007). The Decree came into force on June 13th: therefore investors making use of companies that do not qualify as intermediaries authorised to operate as advisers are obliged (hopefully under some kind of supervision) to assess compliance with legal requirements. It is therefore possible that the group of financial advisory firms under the supervision of CONSOB and Bank of Italy will be expanded, a requirement that we hope will be recognised as essential to work with an institutional investor.

Now that the rules are clear and difficult to fudge, we anticipate the demand for professional investment advisory services to be increasingly well-informed and also specifically focused on supporting specific activities within investment processes increasingly articulated and internalised in the organisational structures of the investors. The “levelling of the playing fields” from the offer side, with the demand for authorised operators acting as catalyst, will produce a competitive market with reliable and qualified operators, selected on the basis of the quality/price ratio.

As in previous years, a summary of the discussion at the conference can be found in the special issue of the newsletter Anteo.