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Investment: A History

Author(s):Reamer, Norton
Downing, Jesse
Reviewer(s):Smith, Roy C.

Published by EH.Net (March 2016)

Norton Reamer and Jesse Downing, Investment: A History. New York: Columbia Business School Publishing, 2016. x + 436 pp. $35 (cloth), ISBN: 978-0-231-16952-3.

Reviewed for EH.Net by Roy C. Smith, Stern School of Business, New York University.

If a time traveler from a hundred years ago were to appear in today’s global financial world, he or she would be stunned by the shear magnitude of it.  A recent McKinsey study reported that the market capitalization of all stocks, bonds and tradable bank loans in the world in 2012 was $225 trillion, approximately three times world GDP. Most of this vast trove of wealth, the traveler would soon learn, was owned by savings, insurance, pension and mutual funds, in which hundreds of millions of ordinary people around the world participated. The money was entrusted to, and managed by, a variety of financial institutions that paid it out to their beneficiaries as they aged or became ill, thereby eliminating much of the scourge of old-age poverty that had been an inescapable part of life for thousands of years.

Norton Reamer, a seasoned investment manager for forty years, and Jess Downing, a relatively new one, have focused their history of investment on the “democratization” of wealth that the industry has enabled.  In the U.S., retirement assets and mutual funds have expanded from trivial beginnings in the 1920s to become investment colossi today, with $37 trillion under management. Their book is a 30,000 feet flyover of the history, institutional development, and current state of the investment management industry. It is thorough, readable, and up-to-date and should be a good place for people interested in careers in the industry to begin their inquiries.

The first four chapters deal with the origins, formation, expansion, and democratization of the industry through the funding of retirement incomes. Chapter five addresses the age-old issue of fraud, market manipulation and insider trading. Chapter six examines the ever-increasing market intervention by central banks trying to balance out market cycles; Chapter seven is a complete and very useful review of the development of the mathematical theories of markets and how they work — topics that  every career aspirant should try to understand. The last two chapters are about new investment products, including passively managed index funds, “exchange traded funds,” and the increasing importance of “alternative investments,” mainly hedge and private equity funds.

The book concludes with a thoughtful analysis of conditions for investing in the twenty-first century, in which the authors note that, though things change with time, technology and demographics, the basic purpose and principles of investing will be much the same. They emphasize four such principles: real ownership (i.e., investing in companies or other entities capable of providing an inflation-adjusted return), understanding fundamental value, the role of financial leverage, and the methodology of asset allocation.

Though the book is self-described as a history, it is much more than that. In fact, the historical portions may be the least useful. What it does well is explain how the growing demand for retirement income generated a variety of new ways to achieve it and to make it available to a much broader base of ordinary individuals. This required the development of new institutions to provide portfolio management skills and custodial functions, and other institutions to regulate and service them in a competitive marketplace. All of this, in turn, required improved understanding of the math and economics of investing, new legal and accounting frameworks, continuous product innovation, and the creation of vast distribution systems.  The great achievement of the investment management industry, which began in the United States but has since been embraced all over the world, is how large it has become in such a relatively short time of sixty years so.

It may be, however, that the altitude of the flyover was too high to pick up important details shaping the investment management industry today. The chapter on fraud, for example, fails to discuss the late trading scandals in the mutual fund industry in the 1990s, the high-speed trading scandals in dark pools in the 2010s, the conflicts of interest between large banks acting simultaneously as investment bankers, traders and investment managers, the increased efforts by managers to gather assets at the expense of managing these assets well enough to justify the fees paid. Similarly, there may also be evidence sufficient now to suggest that hedge and private equity firms have become too big to be able to deliver the abnormal returns expected of them.

There also questions, too, about the future of the industry that Reamer and Downing haven’t addressed – the influence of technology on market efficiency (with high-speed trading a contemporary issue), the effects of massive volumes of passive robo-investing without understanding what effects they have on market volatility and liquidity, and the seemingly immutable, high fee structures that characterize the mutual fund and alternative asset sectors despite lackluster performance over the past five years or so.

There is also a question of whether the retirement industry can generate adequate returns in an economic environment in which normal GDP growth rates are in the 2% to 2.5% range, or less. Numerous public pension funds are virtually bankrupt today, mainly due to underfunding but the underfunding is largely the result of lower than expected returns.

Perhaps such issues don’t matter much in a broad historical picture, but it is arguable that the investment management industry, after so many years of rapid and profitable growth has reached a point where some sort of disruptive technology or institutional shake up may be around the corner, waiting to change things in significant ways.

Roy C. Smith is the Kenneth Langone Professor of Finance and Entrepreneurship at the NYU Stern School of Business, which he joined in 1988. Before that he was a General Partner of Goldman, Sachs & Company.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):General or Comparative