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Do ethics and investment management fit together?

A virtuous life is one of aspiration – to be good, to be fulfilled, and to make a contribution. Ethics is not about doing your duty reluctantly, but rather asking the confronting question: what do I want to be remembered for? Peter Drucker says that if you think you can answer it at 25, you have not yet understood it, but if you cannot answer it at 50 you have wasted your life. How does this impact the investment management industry?

I tell an economist that I am writing a book about ethics in finance, to which she replies, “Why would I want my investment manager to be ethical?” I say, “So he does not rip you off.” What she was asking is whether her investment manager should be involved in projects to achieve altruistic objectives, but I avoided this question. This article is written partly to redeem myself.

People have legitimately different values

I should have said that ethics should not be narrowly defined as controversial social or environmental issues that pit those with tender consciences against those without. There are no easy answers to difficult ethical questions, which require trade-offs between two (or more) goods or values. People come to legitimately different decisions if they see the facts differently, or place differing weights on the competing goods. I may choose to invest through ethical managers, who put social or environmental issues above returns, but cannot say that others have an ethical obligation to do the same.

I could also have said that my book was only partly written for those investment managers who want to make a vocation of being ethical, in the narrower sense, by managing funds with explicit ethical criteria; by lobbying for legislation that requires funds to conform to particular ethical stances; or by using their income to support ethical causes.

If we want to live full lives, we would do well to discover a really worthwhile objective – a vocation by which we can be remembered. I would argue that there are also vocations in funds management outside the narrowly ethical. Let us return to the question of what we can legitimately want from others with whom we do business.

The traditional cardinal virtues, when added to integrity, provide a foundation:

  • Self-control - and thus diligence in analysis and administration
  • Prudent – or wise in choosing investments and limiting risks
  • Just – in charging fairly and avoiding conflicts of interest
  • Courageous – in making decisions even if they may appear wrong to others.

Let’s consider these.

Self-control and prudence

At first sight, the industry might seem to do well on self-control and prudence. But Gaurav Mukunda writes in the Harvard Business Review:

“The financial sector's influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would ‘give up economic value’ and 55% would cancel a project with a positive net present value—that is, willingly harm their companies—to meet Wall Street's targets and fulfil its desire for ‘smooth’ earnings.”

The survey dates back to 2004, but not much appears to have changed. It suggests neither diligence nor wisdom, but rather careless analysis and poor thinking by analysts, managers and, mainly, institutional investors.

It is also an injustice perpetrated against other investors, who do not have the same influence as the institutions. The power of investors (or at least the crude analysts who may be dominating the discussion) also appear at times to encourage companies to abuse employee loyalty, and be aggressive with their tax, safety and environmental policies. Voting at shareholder meetings has improved but is barely effectual.

Charging fairly

Injustice also involves over-charging and over-servicing. Over-servicing seems a problem for small investors who have portfolios individually managed and administered by personal financial advisors. The costs and additional risks are significant. I have also yet to see any relative performance statistics that might show their losses against the index. Investment markets are complex and require teams of professionals with access to the best information to make sensible decisions.

One has sympathy with those who use their local advisor, because the professional teams are only to be found in larger institutions, which are likely to be over-charging. Although he is speaking to his own interests, John Bogle, founder of Vanguard, is hardly alone in arguing that active investment managers are: “parasites with their fees and transaction costs eating into returns earned by the ultimate host: public corporations.”

When I wrote my actuarial investment examinations in 1980, we learnt that the investment department should cost in the order of 0.1% of assets. As a member of various investment committees over the last 35 years, I have seen the number rise significantly, and it was double in Australia when we came from South Africa in 2003. The ethical fund, of which I was chairman until 2002, managed a small profit on 0.5% of the equivalent of about $500 million assets. This was after paying fees for both investments and the evaluation of the social criteria we used. It may also be a difficult ethical problem to draw the line at what precisely is an ethical level of charges, but I would suggest that we are well passed it. The best evidence probably comes from the low SMSF management fees, often managed by finance sector employees who would not dream of investing in the funds their employers offer.


Courage appears in short supply and not just in the CFO’s referred to by Mukunda. Courage is not recklessness, but being prepared to defend one’s position when necessary. The preparation involves both making the resolve to maintain your integrity, and ensuring that you are equipped to do so successfully. This can be a long term exercise. It is surely part of the success of long term fundamental investors such as Warren Buffett, Jeremy Grantham and Allan Gray. They display integrity in telling investors that they will not always get it right, and will not always appear to be right, and courage in sticking with their views in the face of market irrationality. Not, of course, that the courageous always succeed. Tony Dye, of UK fund managers PDFM, famously lost his job weeks before the burst of the bubble. The Economist’s obituary praised his courage, but had it: “Mr Dye has too few successors, but the clients are at least partly to blame.” Trustees also need fortitude to resist ill-informed sponsor and member pressures.

The severity of some of these moral issues may have crept up on us unawares. Most of the people I know in the investment management industry are smart, hard-working and honest. But Gaurav Mukunda is not the only one who believes that the industry is toxic in a number of respects. My book is aimed at my students and those entering the financial service industry. I am a little fearful I might encourage some into ‘heroics’ that will be costly to them. Older readers of this article might be more active and outspoken with less danger to themselves.


Anthony Asher is Associate Professor, School of Risk & Actuarial Studies, UNSW Business School. His new book is Working Ethically in Finance (Business Expert Press 2015). These views are his own and not the opinions of the University of New South Wales or Cuffelinks.


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