A reprinted article from March/April 2020 BOOK REVIEW The Future of Investment Management BY RONALD N. KAHN Reviewed by Judy Benson © 2020 Investments & Wealth Institute®. Reprinted with permission. All rights reserved. BOOK REVIEW MARCH APRIL 2020 The Future of Investment Management By Ronald N. Kahn | Reviewed by Judy Benson A Investment management innovations Kahn’s treatment of more recent invest- typically are launched in the institu- ment management history includes the tional arena and over time wend their first efforts at systematic investing and way to the retail investor. As the the birth of the ideas that eventually pace of change is accelerating, the would form the underpinnings of invest- complexion of retail investing is ment funds. He addresses the ultimate evolving. This cohort is increasingly outcomes of the 1929 stock market cost conscious, more accepting of crash, including requirements for inde- passive investment structures, and pendent audits and disclosures of “gets” the merits of diversified financial statements, as well as a pleth- exchange-traded funds. ora of other rules and regulations. He A Although Kahn focuses on quantita- presents a timeline of crucial investment tive approaches to investing, he management events and details their is emphatic that quant investing roles in progressing investment manage- onald Kahn, PhD, is a managing is a particular form of systematic ment “thinking,” such as Benjamin director and global head of investing. He is emphatic that Graham and David Dodd’s Security R systematic equity research investing (and therefore investment Analysis (1934), John Burr Williams at BlackRock, where he has overall management) is becoming increas- and The Theory of Investment Value, responsibility for the research that ingly systematic—systems, analysis, Harry Markowitz and the birth of mod- underpins the firm’s systematic active structure, and understanding— ern portfolio theory, William Sharpe and equity products. Previously, he was built on increasingly available the capital asset pricing model (1963), director of research at Barra, where he data—which is replacing “gut feelings and Eugene Fama and the efficient mar- focused on the equity and fixed income and whim.” ket hypothesis. Kahn also describes the markets.1 Kahn has written extensively birth and maturation of the index fund, about investing; he has received The book portrays the evolution of the industry adoption of factor models, industry accolades including several investment management from its earli- and the impact of behavioral finance. prestigious awards, and is a recognized est roots all the way to an assessment of expert on portfolio management, risk the future. Each chapter provides his- Kahn presents a cogent defense of modeling, and quantitative investing. torical context and a powerful explana- active management—its goals, the con- With apologies for the cliché, he knows tion of investment management for an stituent parts of the information ratio, from whence he speaks. era—whether past, present, or future. and the job of the active manager— Kahn begins by taking us back to which he defines as forecasting residual His most recent book, The Future of the Dutch East India Company and returns (i.e., alpha) rather than the Investment Management, was released its trading on the Amsterdam Stock calculation of portfolio return minus almost two years ago—some may argue Exchange, the South Sea Company benchmark return. He delves into that is a lifetime in the investment man- and the so-called Bubble Act of 1720, various elements of active management, agement world. Yet the views expressed and the commencement of stock price are rightfully described as prescient. lists in 1691 in the “Collection for The Future of Investment Management Improvement of Husbandry and Trade.” by Ronald N. Kahn The Future of Investment Management He addresses the first broadly available CFA Institute Research Foundation, espouses a number of key tenets about trust—Eendragt Maakt Magt (“Unity 2018 investment management, and here is a Creates Strength”)—as a response to a 136 pages, $17.99 sample (paraphrased): financial crisis. INVESTMENTS & WEALTH MONITOR 51 © 2020 Investments & Wealth Institute. Reprinted with permission. All rights reserved. © 2020 Investments & Wealth Institute. Reprinted with permission. All rights reserved. MARCH APRIL BOOK REVIEW | THE FUTURE OF INVESTMENT MANAGEMENT 2020 such as the importance of understanding the case for several newer sources of Judy Benson is a partner with Barrington how portfolio constraints affect the effi- data—social media, images, and video. Partners in Boston, MA. She is a member of the Investments & Wealth Monitor ciency of implementing investment Smart beta/factor investing comes to Editorial Advisory Board. She earned a ideas. One timely insight explores data the fore and is clearly distinguished BA in business administration and economics mining and the importance of perspec- from active investing. Kahn even makes from Simmons College. Contact her at tive. To quote, “one should judge any the case that incentive fees may become [email protected]. new investment idea on the basis of more prevalent.2 whether it is sensible, predictive, consis- ENDNOTES tent, and additive.” The discussion culminates by addressing 1. Ronald Kahn’s background was sourced the future of investment management. from the book and the institutional website of BlackRock. Kahn also addresses the shift from This reviewer offers no sneak previews or 2. Several recent Investments & Wealth active to passive and the implications of spoiler alerts. Suffice it to say that this Monitor articles address trends in incentive compensation, their relatively low adoption increased competition. He recognizes thought-provoking, 100+ page work is a in mutual funds to date, and the testing of that big data is a positive trend for must-read for practitioners and investors. new incentive structures in those vehicles, active management, as long as there are Kahn’s work provides invaluable context the goal of which is to align investor and investment manager goals. 3 appropriate filters to identify which data on the evolution and near-term future of 3. Next five to 10 years. is meaningful. Interestingly, he makes the investment management industry. ISOLATING THE TAX BENEFITS Continued from page 50 return from the underlying investment investor’s internal rate of return and IMPORTANT RISK FACTORS increases. For example, in the California provide a return of capital necessary to An investment in a Qualified Opportunity Zone Fund program is subject to various risks, including but not limited to: scenario, the spread between the QOF mitigate the investor’s capital gains tax No public market typically exists for the interest of Qualified and non-QOF investment increases liability required to be paid in 2027, Opportunity Fund programs. Qualified Opportunity Zone Fund from 255 basis points to 299 basis resulting from the tax due on the origi- programs are generally not liquid. Qualified Opportunity Zone Fund programs typically offer and sell points should the investment IRR nal $1-million investment for that interests pursuant to exemptions to the registration provisions of increase from 9 percent to 11 percent. portion not otherwise stepped up. federal and state law and, accordingly, those interests are subject to restrictions on transfer. There is no guarantee that the investment objectives of any Further, these examples assume no In the final analysis, and this cannot particular Qualified Opportunity Zone Fund program will be interim distributions from the invest- be emphasized enough, this is a real achieved. ment. In the case of, say, a $100-million estate transaction. If you like the Investments in real estate are subject to varying degrees of risks, including, among other things, local conditions such as multifamily development commenced transaction, property(ies), and sponsor, an oversupply of space or reduced demand for properties, and in January 2020 (investment made in the potential tax benefits provide a inability to collect rent, vacancies, inflation and other increases in operating costs, adverse changes in laws and regulations 2019), it generally takes approximately powerful supplement to enhance applicable to owners of real estate and changing market two years to deliver a completed devel- after-tax returns. demographics. opment and another 12–18 months to The acquisition of interests in a Qualified Opportunity Zone Fund Kevin A. Shields is the chairman and chief program may not qualify under section 1031 of the Internal stabilize that asset to, say, 90-percent Revenue Code of 1986, as amended (the “Code”) for tax-deferred occupancy. At that time, the sponsor executive officer of Griffin Capital Company, exchange treatment. LLC, an alternative investment management can recapitalize the property, slightly The actual amount and timing of distributions paid by Qualified firm that he founded in 1995. He earned a JD, Opportunity Zone Fund programs is not guaranteed and may vary. increase the leverage ratio, and, given an MBA, and a BS degree in business, all from There is no guarantee that investors will receive distributions or a the property appreciation generated over the University of California, Berkeley. Contact return of their capital. the three to three-and-one-half years him at [email protected]. Qualified Opportunity Zone Fund programs generally depend on tenants for their revenue and may suffer adverse consequences