Fiduciary Finance
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Fiduciary Finance

Investment Funds and the Crisis in Financial Markets

Martin Gold

This multi-faceted analysis of institutional investment defines ‘fiduciary finance’ institutions as the third pillar of the financial system, alongside banks and insurers. It documents the role played by investment funds and the money management industry during the recent financial crisis, and provides an unashamedly critical review of the business disciplines which can dominate investment practices. It clarifies the economic significance of the investment industry (circa $60 trillion in assets) and the features which differentiate fiduciary finance from traditional financial institutions such as banks and insurers.
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Chapter 3: Investment in its Institutional Setting

Martin Gold


INTRODUCTION Perhaps the most significant normative assumption underlying the development of financial markets and the fiduciary finance industry is the implicit expectation that ‘investment’ is an activity conducted strictly in conformance with classical economic assumptions. Undoubtedly, ‘valueseeking’ is an important motivation for investment analysts and fund managers, however, a range of commercial forces operate which can create significant disparities between applied portfolio management practices and scholarly descriptions of the discipline. The fiduciary duties associated with collective investment products, in particular, introduce moral obligations that are extraneous to the assumptions of orthodox finance theory. The fiduciary finance industry has also directly shaped the financial markets themselves demanding more realistic measures of portfolio performance which has resulted in different measures of the ‘market’ according to ‘investability,’ while markets have fragmented into alternative trading venues which some regard as a direct threat to market efficiency and stability. As a fledgling scholarly discipline, attempts have been made to define investment according to putative grounds by differentiating it from ‘speculation’: volatile financial markets have given rise to a perception that investing is, in fact, another form of gambling. Such comparisons are somewhat distasteful for the marketers of fiduciary products and scholars alike; however, these distinctions can be addressed with reference to the literature. The institutional setting of investment, therefore, is a product of both theoretical developments and more practical considerations. Aside from the generic investment functions of portfolio management (security selections and cash flow management), security custody and administration, monitoring and client servicing, the...

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