'Frontier Investors' Push Back Against Asset Management Norms

Frontier investors--located in cities outside of the major international financial centers--are re-taking responsibility of the end-to-end management of their assets, according to two university professors.

(January 24, 2013) — A growing community of long time-horizon institutional investors known as ‘frontier investors’ that includes sovereign funds, public pension funds, and endowments, located in cities outside of the major international financial centers (IFCs) are rethinking how they allocate capital, according to a research paper.

Their goal: to ‘insource’ asset management, according to Adam Dixon of the University of Bristol and Ashby Monk from Stanford University.

The authors assert that these large beneficiary institutions located outside IFCs represent a window of opportunity to remake the map of the investment management industry. However, “replicating the external market for financial services within the community of frontier investors brings up significant issues related to scale and expertise,” the authors warned.

“The global financial services industry has been subject to ongoing criticism in the wake of the 2008-09 financial crisis,” the paper asserts. “From social movements like Occupy Wall Street to the economic elites at the World Economic Forum, there is widespread concern that the leading edge of the financial services industry has lost sight of its overarching objective function: To facilitate the efficient allocation of economic resources over space and time under conditions of risk and uncertainty.”

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According to the paper–titled “Frontier Finance”–this growing community of long time-horizon institutional investors is pushing back against the misaligned incentives, high fees, poor returns, and short-termism embedded in most third-party asset management agreements– all of which the financial crisis fueled.

The objective of frontier investors aiming to insource asset management is to maximize the welfare of beneficiaries, the authors claim.

Click here to read the full paper.

The number of new federal securities fraud lawsuits seeking class-action status has fallen to a 6-year low in 2012, a study by Stanford Law School and Cornerstone Research has shown.

(January 24, 2013) — Securities fraud class actions are on the decline, according to a study by Stanford Law School and Cornerstone Research.

The study showed that the number of new federal securities fraud lawsuits seeking class-action status fell to a 6-year low last year. In 2012, there was a total of 152 such lawsuits filed, which was down 19% from 188 the previous year. The decline was largely due to fewer lawsuits challenging mergers, the researchers said.

The study also confirmed that large companies also were sued less in 2012 than in prior years. Seventeen companies in the Standard & Poor’s 500 index were named as defendants in 2012, versus an average of 31 over the prior decade.

“Data in the recently published SEC report on the Dodd-Frank whistleblower program provide potentially valuable insights for possible future securities litigation trends,” the report forecasted. “From October 1, 2011, through September 30, 2012, the SEC received 3,001 whistleblower tips. The most common tip categories were Corporate Disclosure and Financials, Offering Fraud, and Market Manipulation. Together, these categories accounted for nearly 49 percent of all tips received.”

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The survey showcasing a drop in fraud class actions comes as Deloitte & Touche has won dismissal of a lawsuit filed by an Iowa pension fund over the auditing of WG Trading Co. US prosecutors said the company was used as a Ponzi scheme by two of its former managers. The pension, which reportedly invested nearly $500 million in entities controlled and used by both men, sought about $39 million of an investment and fees made in WG Trading, Bloomberg initially reported.

In a complaint filed last year, the $23.9 billion Iowa Public Employees’ Retirement System said that it suffered millions of dollars in losses as a result of the scheme.

The case is Iowa Public Employees’ Retirement System v. Deloitte & Touche LLP, 12-cv-2136, U.S. District Court, Southern District of New York (Manhattan).

Read about the study by Stanford Law School and Cornerstone Research here.