Hermes' Nusseibeh: Investors Are Guilty of Fueling Dangerous Financial Complexity

(October 12, 2011) — Saker Nusseibeh, the head of investments of Hermes and chairman of the new 300 Club, says that institutional investors have gotten caught up in a risky world of irrational behavior, failing to look at the big picture.

The newly created 300 Club consists of ten investment professionals — mainly in Europe and Australia — who aim to raise awareness about the potential impact of current market thinking and behaviors, and to call for immediate action. The club is aiming to encourage other investment professionals from the United States to join.

Nusseibeh urges investors to question the complexity that people are adding to investments. “The world is complex and financial markets are particularly complex. The 300 Club questions the need to put even more resources into complex structures and financial engineering, which gives a false sense of security and contributes to the erroneous idea that you can achieve bigger and better returns with low risk,” he tells aiCIO.  

Quoting Albert Einstein, Nusseibeh says: “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction.”

The 300 Club is mainly concerned about two areas, according to Hermes’ Nusseibeh. “First, we want a transparent debate about the theories of investment, which we feel are often misunderstood, misapplied, or plain wrong. People have forgotten where most theories come from,” he says, citing Harry Markowitz’ capital asset pricing model (CAPM) theory. 

“At the base of Markowitz’ work, he talks about several assumptions you need to make in order to make the model work. The theory is sound. It’s a good idea, but we object to the way people have applied it. The result has been an increase in volatility,” says Nusseibeh, noting that the 300 Club aims to discuss the presumptions of financial theories, questioning their validity. “We question the efficient market hypothesis, the idea of alpha, and high returns with low risk. We just want to have a debate.”

The 10 founding members of The 300 Club include Nusseibeh along with Zuhair Mohammed, Aon Hewitt; William De Vijlder, BNP Paribas Investment Partners; Prof Amin Rajan, CREATE-Research; Lars Dijkstra, Kempen Capital Management; Adriaan Ryder, Queensland Investment Corporation; Robert Talbut, Royal London Asset Management; Alan Brown, Schroders; Dylan Grice, SocGen; and Yves Choueifaty, TOBAM.

According to Nusseibeh — who urges investors to be more cynical — even the brightest and most sophisticated investors have forgotten that there is a difference between measuring risk and uncertainty — a confusion that he says fueled the financial crisis. “We don’t have a culture of dissent in investment. We have a culture of following the heard. That culture of dissent says that the government can’t pay for debt, and that subprime wouldn’t work,” he tells aiCIO.  

Furthermore, he says institutional investors should be better at using in-house management and the expertise of their managers more effectively, relying on outsourced talent when needed. “I’m against the distancing between managers and institutions — where managers are selling products to institutions, but not using expertise effectively.”

Lastly, Nusseibeh told aiCIO that the financial industry is guilty of increasingly clouding the business with the profession, comparing investors to doctors, who are forced to sign the Hippocratic Oath to do no harm. “Similar to doctors, the asset management industry needs to first, worry about doing no harm, and then worry about making enough money to pay the bills.”