To be able to fully understand what it means to combine or separate investment banking from commercial banking one needs to know how the two types of banking function. As Erkki Liikanen put forward in the European Commission, high-risk market activities by large banks are a threat to clients, and taxpayers in general, who deposit their savings at the bank. Now that we have all witnessed how the average consumer got dragged into the problems of large, TBTF (too big to fail), investment banks that clearly overdid it with speculations and risky investments we need to all form an opinion on regulation or deregulation of the financial sector.
The course of Banking&Investment Management was taught by a very knowledgeable lecturer, Mark Henny LLM MBA, who runs his own investment and asset management company in Zurich. The focus of this course was on investments management, the topic banking was touched upon shortly in order to explain the dependencies between and origins of the two fields. Having worked in the finance and banking industry the lecturer fascinated the class with many examples from his work in the investment industry.
The course was structured into a theoretical and a practical part each day. A summary of the historical development and commercialization of funds and securitization as well as an explanation of definitions was given. Important theories, like MPT (Modern Portfolio Theory) as well as the CAPM (Capital Asset Pricing Model), were explained and evaluated. To fully understand what funds to invest in one needs to differentiate between traditional (shares and bonds) and alternative (commodities, real estate, hedge funds) asset classes. One very important investment vehicle, the hedge fund, was discussed more deeply. Its performance is evaluated, unlike exchange-traded funds (ETFs), by using absolute rather than relative return. The amount that people invest in funds worldwide, especially pension funds ($30bn), is impressive.
An important question that came up during the course was why people invest so much money in funds that, on average, generate low or even negative relative returns. As one would expect to see only brilliantly clever experts in fund managerial positions it was surprising to learn that up to 75% of fund managers do worse than the benchmark/index. Much of investor behaviour can be explained by behavioural psychology and is shockingly simple. Herding, anchoring and the unwillingness of investors to realize losses are simple characteristics that can explain the movements in financial markets and investor’s behaviour.
On all of the seminar days the students worked on one or two cases that required the preparation of presentations with groups of three or four. The presentations were set up as a recommendation to the firm that was dealt with in the case given by those students representing financial analysts. Along with cases about the Man group and The Credit Suisse Christian Values Fund the students evaluated an investment in the commodity gold. The Yale endowment model was presented as an example of a mutual fund that generated significant return by investing partially in non-traditional assets. Next to qualitative investment decisions statistics showed that quantitative investments analysis could lead to an outperformance of the index if one follows the momentum strategy.
As financial markets became more and more deregulated in the 90s the impact of this on investment banks triggered many new investment vehicles and strategies - these were critically evaluated in class. On the last day of the 3-day course a very important aspect of investing was brought up by the lecturer, namely SRI (Socially Responsible Investment) and Ethics of Investment Banking. In many cases these “Green Investments” turn out to be simply an example of “Green washing” as well as religiously oriented funds which do not always follow their original values. The course ended with a discussion on the problem of money laundering as well as an assessment of future trends by the lecturer.
Mira – IMP student