Reading 2.1

Question 1

Investment industry is a subset of the ___ industry together with __, ___, ___, and ___

Answer 1

Finance

Safekeeping
Payment
Lending
Insurance

Question 2

Key activities of investment industry

Answer 2

Allocating capital
Wealth & Risk management

Question 3

3 Participants of investment industry

Answer 3

1) Participants - ecosystem’s key components and resources, include institutions and agents such as asset owners, asset managers, consultants, brokers, investment banks, and service providers; regulators; and end savers.

2) Technologies - factors in getting things done. They are derived from functions (e.g., governance, regulation, investment theory, and ideation) and implemented in processes such as investment strategies for allocating capital and business models of asset owners and asset managers.

3) Markets

Question 4

4 purposes of investment industry:

Answer 4

1) Fundamental purpose - contribute to society via increases in societal wealth and well-being.

2) Intrinsic purpose: mobilize the sourcing and allocation of capital to where it is needed.
This enables savers’ excess funds to be made available to entities that need them to enact their ideas.

3) core purpose: provide wealth & risk management services

4) Collateral purpose: produce jobs, opportunities and rewards for investment professionals and organizations

Question 5

Principal definition

Answer 5

Meaning asset owner

Key investment industry player

Question 6

Allocators

Answer 6

Legal entities with capital to allocate (their or some one else’s)

Question 7

Value chain definition and includes who?

Answer 7

Multiple agents or intermediaries that provide services to the principal (client) aiming to create value for the client

Question 8

Agents

Answer 8

Asset managers, etc

Question 9

Stakeholders

Answer 9

All participants with a stake in an industry

Question 10

5 qualifying qualities of an asset owner or allocator

Answer 10

1. They work directly for a group of beneficiaries (or savers or investors) as the manager of their assets in a fiduciary capacity (upholding loyalty, prudence, and care) under delegated responsibility.
2. They work with a sponsoring entity (typically a government or part thereof, company, or nonprofit).
3. They work within explicit law and have an implicit societal license to operate because of their societal trust and
   legitimacy.
4. They deliver mission-specific outcomes to beneficiaries and stakeholders in the form of payments or benefits into the future.
5. They use business models that combine a governance budget (resources and processes) and a risk budget (reflecting a mix of financial assets that delivers on the mission).

Question 11

List of organizations that qualify as asset owners or allocators

Answer 11

Pension funds are the largest group of asset owners that meet all of these traits.

Sovereign funds, endowments, foundations, and OCIOs (outsourced CIOs/fiduciary managers) also fully qualify; but OCIOs are agents of asset owners, serving the role of asset owners.

Other institutions (e.g., insurance companies and mutual funds) partly qualify as asset owners.

Question 12

In developed markets, funds withdrawn from listed equity markets via acquisitions for cash and share buybacks ____ the amounts raised in ____ and ____.

Answer 12

exceed

rights issues

IPOs

Question 13

Share buybacks are often funded by _____, implying that listed firms’ managers engage in _____ on themselves.

Answer 13

bond issuance

financial engineering

Question 14

2 main activities of investment industry

Answer 14

1) wealth & risk management - constructing portfolios + mostly point time risk management

2) stewardship - engaging with company’s management on the best way to generate sustainable long term growth

Question 15

the industry earns a higher value creation score for _____ than for ____.

Answer 15

managing wealth and risk

allocating capital

Question 16

Organizational level purpose likely reflects 3 factors:

Answer 16

1) passion of the organizations people

2) organization’s competencies

3) effectiveness of profit and performance drivers

Question 17

Sustainability definition

Answer 17

Brundtland report (1987), “meets the needs of the present without compromising the needs of future generations to meet their own needs.”

Question 18

2 ways to create sustainable value

Answer 18

1. From the financial outcome: investing for sustainability impact can lead to improved financial outcome.
2. From the impact: value creation that the investment strategy generates on real-world issues (e.g., climate change).

Question 19

Social license principal

Answer 19

investment organizations relying on a covenant from society to pursue financial goals.

It is based on realizing socially-valued goals, which legitimizes pursuit of commercial goals.

Question 20

Shared value model

Answer 20

Companies focus on maximizing shareholder value and contribution to society

Question 21

Triple bottom line definition, who and when introduced?

Answer 21

Measures company’s success in 3 key areas: profit, people and planet

John Elkington 1994

Question 22

Who argued that argued that a company’s competitiveness and its community’s health are mutually dependent; thus, shared value is necessary for reshaping capitalism and its relationship to society.

Answer 22

Porter and Kramer (2011)

Question 23

Who suggested that shareholder value should not be a company’s objective but the outcome of its activities in line with its objective to survive and grow

Answer 23

Eccles and Youmans (2015)

Question 24

Hart & Zingales (2017) stated what

Answer 24

argued that value creation is more than financial return: directors have a fiduciary duty to maximize shareholders’ welfare (not value), which may include “pro-social aims. “

Question 25

System value model

Answer 25

Places a business within society and places society within the environment. In this framework, the investment industry is not independent of society or the environment; it affects (and is affected by) both.

Question 26

From this system’s view, value creation in the investment industry should:

Answer 26

1. Be seen as activities used to create future wealth and well-being for stakeholders (in line with its fundamental purpose).
2. Be judged by various stakeholders
3. Occur over extended periods of time, with its progress assessed looking back and forward.

Question 27

Purpose of fiduciary duty

Answer 27

compel key agents in the investment chain to adopt high standards of professional practice so that their clients are protected from agents’ abuse of power.

Question 28

4 areas of fiduciary duty

Answer 28

1. Loyalty - acting according to the specific power of investment by placing beneficiaries’ interests first when establishing investment strategies and avoiding conflicts of interest.
2. Prudence and care - investing to the standards of a prudent person, exercising good judgment and reasonable care.
3. Diversification - diversifying according to principles of accepted investment theory and practice.
4. Impartiality - not favoring interests of one or more particular beneficiary over others.

Question 29

4 challenges of fiduciary duty

Answer 29

1) No objective interpretation of the obligations. In practice, investment theory together with peer practice is typically used.

2) Interpretation of fiduciary duty is not fixed in time, they evolve.

3) no globally consistent interpretation

4) Part of the fiduciary mindset is to always put financial interests first

Question 30

5 values that support true fiduciary and professional midset

Answer 30

1) ethical and professional behavior

2) Partnership - the relationship is mutually beneficial

3) Client first - understanding and meeting their needs

4) Transparency, integrity, accountability

5) Public responsibility and clean license to operate

Question 31

Regarding the professionalism skill set, there a number of key areas that define a profession:

Answer 31

1. Professionals adhere to a “best practice” standard
2. Professionals strive to continue to learn and grow their knowledge base
3. Professionals are diligent, competent, and objective throughout the investment process
4. Professionals judge risks comprehensively and avoid unnecessary risks

Question 32

3 main channels through which culture influences organizations

Answer 32

1. Aligns values and beliefs, establishes expectations and trust, and reduces uncertainty.
2. Builds focus on factors that matter in all organizational settings and situations.
3. Captures the power of strong communication and engagement in the organization and in client interactions.

Question 33

3 areas where the right choice is not always clear

Answer 33

1) conflict of interest

2) Trade off between benefits and costs for different stakeholders

3) Insufficient knowledge of the client

Question 34

Questions to evaluate culture

Answer 34

1. Is there well-managed capacity and capability to support achieving client expectations?
2. Is there a process and attitude to listen to clients and regularly get their feedback?
3. Is significant attention and sophistication given to understanding and managing client risks?
4. Do professionals understand professional and ethical practice and its boundaries and practical application?
5. How does the professional prioritize the client, firm, and self and regard for societal interests?
6. How does the organization view the principle of fair rewards, and can it demonstrate that it aligns with this principle?
7. What levels of trust exist between the organization and its clients?

Question 35

There are three widespread investment industry failings.

Answer 35

1. Weakness in the value proposition, where the value created does not match the fees charged
2. Misalignments in the values of asset management firms with their clients
3. Communication with inadequate accuracy and honesty

Question 36

4 states of investment industry and society

Answer 36

Misaligned: Good for industry & Bad for society

Professional: Good for industry Good for society

Absent; bad for industry & bad for society

Unnecessary: bad for industry & good for society

Question 37

Describe the virtuous cycle of positive force as a result of Fiduciary and professional mindset and its components

Answer 37

• The portfolio benefits from high-grade skill and attention, which makes realizing performance goals more likely

• The client benefits from best investment performance reinforced by trust in the asset manager, which makes a sustainable relationship more likely.

• The asset manager benefits from a sustainable, commercially successful client relationship, reinforcing the self fulfilling formula of fiduciary and professional culture

Question 38

A professional and fiduciary mindset in an organization and among individual professionals creates value for clients and portfolios via several features.

Answer 38

1. Values and behaviors aligned with fiduciary duty and focus on client interests
2. Effective client relationships with trust and empathy, in which communication is transparent, accurate, and authentic.
3. Working with a holistic (or systemic) model and actions that relate to value creation relative to a mix of goals
4. Adopting fair rewards given the resources and outcomes involved
5. Strong regard for public responsibility and adherence to a clean social license