(Pictured: Paul Woolley)
There is no evidence that today’s finance industry is more efficient than it was in the 1960s, the annual conference of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality was told last week.
Professor Thomas Phillippon, of New York University, said that unit costs associated with the industry were higher than they were in 1900, despite the massive advances in IT.
“Prices have not fallen. Prices have not become more informative,” he told about 100 invited attendees in Sydney.
The Australian conference is hosted by the University of Technology Sydney, one of the three universities which do research work for the Centre. The others are the London School of Economics, where the main sponsor, Paul Woolley, is a senior fellow, and the University of Toulouse. Woolley is a former funds manager at GMO in the UK. Professor Ron Bird, who is stepping down from his full-time position at UTS and has organized the Australian conference and Centre’s program, is also a former GMO fund manager, as is Jack Gray, who is continuing his role at UTS.
The GMO connection is relevant because the three academics-turned funds managers-turned academics (Gray is still doing both) all question the role of momentum investing, which most managers, including GMO, incorporate in their styles largely for business protection reasons.
Paul Woolley wrote an article, published last week in the Financial Times, entitled “Momentum is a losing strategy for long-term investors”. In it he says: “Trend followers are by definition late for the party and leave well after it’s over.” The article was also critical of hedge fund managers, which also “make extensive use of momentum” although they ostensibly are free from the restrictions of traditional benchmarks.
“Ironically, asset holders are choosing between the conventional index-hugging approach blighted by the enforced use of momentum, and a product whose principal tool is momentum, turbocharged by leverage. The only difference is that the role of momentum is to reduce risk in the first case, but to gain return in the second,” Woolley says.
Several speakers bemoaned the fact that the world had wasted a good crisis, or words to that effect.
Professor Gur Huberman, of Columbia University, examined the publicly available data for several of the major US banks at the centre of the crisis in 2008 and pointed to little or no punitive action except in new capital requirements.
Doug Henwood, the editor of ‘Left Business Observer’, also based in New York, was more colourful. He said Wall Street was the most powerful political and economic force in the US both before and after the crisis, which was surprising: “you would have thought they’d at least have been given a hair cut”.
He added: “New legislation, such as Dodd Frank, has principally been written by the bank lobbyists.”