Lunch with economist Eugene Fama

One thing to start with: Welcome back to FT Asset Management. I hope you had a great summer and can’t wait to get going for fall term.

“Efficient markets is a hypothesis. it’s not reality’

Eugen Fama is probably the most famous and influential finance teacher in the world. This is due to his revolutionary efficient market assumption – that stock prices incorporate all available information at any given time, thanks to the cumulative and never-ending efforts of millions of investors who are constantly trying to outperform it. The paradox is that, as a result of their efforts, the stock market is practically impossible to beat.

EMH is the closest finance has to a “theory of everything” and won Fama the Nobel Prize in Economics in 2013. His work laid the intellectual foundations for what is now the multi-trillion dollar passive investment industry, and indeed , among his disciples are the likes of AQR’S Cliff Asnessand Rex Sinquefield and David Boothfounders of the $740 billion investment group Dimensional background advisors.

In this must-read lunch with the FT interview, FT Alphaville editor Robin Wigglesworth talks to Fama, 85, about how the core of the efficient markets hypothesis became dogma in financial academia – and why it remains as controversial today as it was when he first proposed it half a century ago century.

Fama – currently professor of finance at University of Chicago — has famously harsh views on the investment industry, when he quipped “I’d compare stock pickers to astrologers, but I don’t want to badmouth astrologers.”

He is surprisingly phlegmatic when it comes to defending his life’s work, echoing the famous British statistician George Boxhis observation that all models are wrong, but some are useful.

The efficient market hypothesis is just “a model,” Fama tells Robin:

“It has to be wrong to some degree. The question is whether it is effective for your purpose. And for almost every investor I know, the answer is yes. They won’t be able to beat the market, so they might as well act as if the prices are fair.”

Secret superyacht trips and fake documents: how H2O tried to cover up a scandal

In the summer of 2019, H2O asset management faced a dilemma.

Those from Great Britain Financial Conduct Authority he had just asked the firm to hand over documents relating to a series of controversial investments he had made that were related to Lars Windhorsta persistent financier with a criminal past.

The regulator’s request capped a torrid month for the asset manager, my colleagues write Robert Smith and Cynthia O’Murchu. An investigation of Financial Times recently revealed that it had poured substantial sums of money into investors in these illiquid securities, prompting jittery clients to withdraw €8 billion from the €34 billion funds it managed.

Demanding evidence of the research and valuation work H2O carried out was a major problem: the firm often carried out little or no due diligence before buying bonds and shares, the FCA later found, while a review committee which he had to examine. the investments have not been touched for months.

However, rather than accept these lax checks and balances, certain H2O employees falsified documents and even fabricated minutes of meetings that never took place, according to findings published by the British regulator last month after an investigation by five years.

At the same time, H2O tried to hide from regulators that its senior managers had been bribed and fed for years by Windhorst—the notorious financier behind its illiquid investments—who spread the company’s best people around with trips to around the world in his private jet. and superyachts.

When the FCA initially checked its dealings with the funder, H2O indicated it had not received gifts and entertainment from Windhorst, the regulator revealed last month.

The alleged cover-up came to light when H2O last month agreed to pay €250m to investors to avoid a fine from the FCA, which described its regulatory breaches as “extremely serious”. The FCA accused H2O of trying to “conceal certain matters” to “conceal the severity of its due diligence and deficiencies in systems and controls”.

Read the full story here

Chart of the week

European sustainable investment funds’ exposure to defense stocks has more than doubled since Russia’s invasion of Ukraine, as policymakers insist on the need for a strong defense industrial base.

Around a third of European and UK funds focused on environmental, social and governance issues now have €7.7 billion invested in the sector, it says Lee Harris and Sylvia Pfeifer in London. This compared to €3.2 billion in the first quarter of 2022, according to an analysis for Financial Times of Morningstar Direct.

While the rise in value is partly due to a rise in the share prices of defense companies since Moscow’s large-scale attack on Ukraine in February 2022, many investors have also accepted the governments’ argument that support for arms makers, long the subject of boycotts and protests students, should have positive social connotations rather than exclusively negative risks.

“The situation in Ukraine has really brought to the fore this idea of ​​’Can we really defend ourselves?'” he said Sonja Laudinvestment director at Legal and general investment management.

The fighting in Ukraine has sparked a debate about whether military contractors can be viewed as an ESG investment.

While investments in controversial weapons such as cluster bombs and anti-thermal mines, as defined in international treaties, are prohibited – a well-established status in the asset management industry – Laud believes that defense can be seen as sustainable.

Companies should still be assessed individually, as would the weapons they make and which countries they were sold to, “but we wouldn’t rule out defense as a matter of principle.”

Top 10 picks since we’ve been gone

Significance of the market sell-off: August’s run signaled the end of post-pandemic stability and the beginning of a new period of unpredictability.

If at first you don’t succeed. . . Bill Ackman seeks to revive the initial public offering of Pershing Market USA by offering sweeteners to early investors.

Lunch with FT: investor and Work donor Stuart Roden on the challenges they face Keir StarmerBritain – and why hedge fund management is like tennis.

The inside story of how hedge funds like Ken Griffinhis City fight back against Securities and Exchange Commissionhis “aggressive” agenda.

Once considered a cash cow by Saudi Arabia’s dealmakers The public investment fund slowed global investment spending, ending an era of easy money.

BlackRockhis support for ESG measures fell to a new low and Vanguard did not support any environmental or social measures in the 2024 proxy season.

Warren Buffetthis Berkshire Hathaway became the first publicly traded US company outside the technology sector to be valued at $1 trillion.

In the hills of southern England, Blackstone head Stephen Schwarzman he met a formidable new adversary: ​​the great newt.

Hargreaves Lansdownethe UK’s pioneering investment platform for retail investors, has agreed to a £5.4bn takeover by a group of private equity firms.

Chancellor Rachel Reeves wants to create a ‘Canadian-style’ pensions model in Britain: here’s why Britain’s Local government pension schemes presents an opportunity.

And finally

Life, work and contemporary art come together in my friends Nicolas Mazet andKate DavisDelicate renovation of an 18th century mansion in Aix-en-Provence. Here is the story behind a Provençal gallery apartment.