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Investment Theory Often 'Plain Wrong': Hermes CIO

Wednesday, 12 Oct 2011 | 6:48 AM ET

Investment theory is over complicated and often wrong, escalating financial crises like the one in 2008 and currently within the euro zone, Saker Nusseibeh, CIO at Hermes and Chairman of The 300 Club told CNBC.

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The newly created 300 Club is a group of ten preeminent investment professionals who claim their mission is to "raise awareness about the potential impact of current market thinking and behaviors and call for immediate action."

The club is named for the legendary 300 Spartans who in accounts of ancient Greek history resisted the Persian emperor Xerxes I and his army of one million at the Battle of Thermopylae in 480BC, a reference Nusseibeh said was relevant as members "have stood up because we think it's right and proper to stand up."

"What we came to see was that collectively we know that a lot of the so-called theory that people use to invest is over complicated, is either misunderstood, misapplied or plain wrong.

"There's too much complexity in the way that people invest and actually that has in our view been part of the reason that led up to the crash of 2008 and part of the reason why we are where we are now," Nusseibeh explained.

Members of the club include Societe Generale global strategist Dylan Grice and CIO of BNP Paribas Investment Partners William De Vijlder, with all members speak independently of the companies they work for, Nusseibeh said.

"We're from the industry, the industry over the last 20 years has gone down the path which is well intentioned but is actually going the wrong place… We as individuals, not as representatives of our institutions have been talking to each other and it seems to us that a lot of things that we take for granted, that we accept amongst each other, we never quite say publicly because the industry has gone to a place now where it sells products to people rather than gives true advice.

"I accept that we put ourselves individually , in a career sense and as an industry , at risk but it's right that we should do so because this is not about the industry or us, actually this is about society," he said.

Pensions Vulnerable

Pointing to pension funds as particularly vulnerable to complex investment practices, Nusseibeh said many investment funds and professionals had conflated "presumption" for "science".

"The investor pool through pension funds and through other saving vehicles control a lot of the supply of investment that goes into the marketplace… they are advised by professionals who seem to have taken presumptions, turned these presumptions into what they believe is science, applied them incorrectly and then we're surprised at the volatility that resulted," he said.

As well as overly complex investment instruments, The 300 Club cites excessive focus on products rather than investor needs and the "presumption" that markets always rise in the long term as beliefs and practices that put pension funds in particular at risk.

Describing fund managers as "factories" solely concerned with providing "products", Nusseibeh said the last five years had seen a total breakdown in a "fiducial responsibility" on the part of fund managers towards their clients.

"When I started in the City 25 years ago, there was a sort of fiducial responsibility of the asset managers - with a small 'f' - between them and their end clients," he explained.

However, Nusseibeh stopped short of attacking his colleagues in the industry by stressing that individual investment professionals had acted with "the best of intentions" but the investment industry as a whole no longer acted rationally.

"I think each person in this sequence has behaved to the best of their intentions, I think the problem is that the end result ha s not been to the good of all," he said.

"Let's get away from this feeling that if things are complicated (pseudo science), we will somehow get a better return with less risk that we would otherwise... it's economically nonsense," he added.

The 10 founding members of The 300 Club include: Saker Nusseibeh, Hermes; 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.

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