tag:theconversation.com,2011:/us/topics/investment-fund-23964/articlesInvestment fund – The Conversation2024-01-25T20:45:23Ztag:theconversation.com,2011:article/2181142024-01-25T20:45:23Z2024-01-25T20:45:23ZWhat do I need to know before investing in ETFs and what are the risks?<p>Exchange-traded funds (ETFs) are tradeable units that have different types of investments all bundled by a professional fund manager into a single investment. In the “bundle” you might have shares, bonds, property investment and other types of investments. </p>
<p>That means people who hold ETFs are investing in a diverse collection of assets across various sectors, markets, companies and regions. With a single ETF you can own a piece of multiple companies or bonds.</p>
<p>They are issued by financial services companies, such as Blackrock, Vanguard, and State Street, and managed by professional fund managers. You can buy and sell units in an ETF fund through a stockbroker; many people use an online broker such as CommSec, CMC Markets, eToro or others.</p>
<p>ETFs can be traded on the Australian Securities Exchange (ASX), or another exchange. The market price of an ETF, which is disclosed daily, will typically follow other benchmarks in the market such as the ASX200 or the S&P500.</p>
<p>ETFs have grown very <a href="https://www.investordaily.com.au/markets/54140-how-australia-s-etf-industry-grew-from-100k-to-over-150b">popular</a> over the last two decades, especially among <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/20-years-of-etfs-on-asx">younger investors</a>. But what are the potential <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/benefits-and-risks">benefits and risks</a> of ETFs?</p>
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Read more:
<a href="https://theconversation.com/what-is-an-etf-and-why-is-it-driving-bitcoin-back-to-record-high-prices-170095">What is an ETF? And why is it driving Bitcoin back to record high prices?</a>
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<h2>What are the potential benefits?</h2>
<p>In traditional shares investing, you might research one company and if you believe it will do better, you buy shares in it in the hope its share price rises.</p>
<p>With ETFs, you buy a “bundle” (a number of units) of shares and other securities, that is put together and managed by a professional fund manager. If the market goes up, the value of the ETF should too. </p>
<p>This means investing in ETFs can allow you to spread your risk across a lot of different regions and different markets (such as shares, bonds, property, companies and so on). You aren’t putting all your eggs in one basket. And you can let a professional fund manager worry about selecting the various investments and managing them. You don’t need to be an expert on one particular company or industry.</p>
<p>ETFs also offer flexibility to respond to market trends. They are usually easier to sell quickly than many other types of investments, such as property. This offers freedom to adjust your investment portfolio often and as you like.</p>
<p>Many ETFs that distribute dividends allow the investor to reinvest these dividends automatically to benefit from compound growth over time. </p>
<p>ETFs can also be cost-effective, because the administration is handled by the exchange (such as the ASX).</p>
<h2>What are the risks?</h2>
<p>Like any investment, ETFs carry risk.</p>
<p>A lot depends on the type of ETF and underlying assets in the “bundle”.</p>
<p>If you aren’t careful, you can end up buying a higher-risk ETF without realising it. So it pays to know what types of investments and in what proportions are in your “bundle” (which is known as your asset allocation).</p>
<p>Asset allocation should be aligned with your risk tolerance. Investors have different tolerances for risk depending on their age, financial goals, investment time horizon, preferences and personal comfort with market volatility. Knowing your risk tolerance helps you manage your emotional reactions during market downturns. </p>
<p>A retiree with a likely low tolerance to taking risks might choose an asset allocation that exposes them to low-risk assets. Someone saving for retirement might have more riskier share investments as they aim to grow their nest egg.</p>
<p>Just like shares, ETFs are subject to market fluctuations. If the market experiences a downturn, then the value of the ETF may decline too (depending on what’s in your ETF). Much of the risk depends on what type of assets the ETFs hold.</p>
<p>And in times of market stress, ETFs may not be as easy as they normally are to convert into cash. </p>
<p>Some financial products bought and sold every day on the market include debts or derivatives (futures and options investments). If your ETFs contain in the “bundle” some debts or derivatives, there is always the risk the party on the other side of a financial transaction may default on their debt obligations.</p>
<p>Growth in Australian exchange-traded funds under the management of a professional ETF manager has been robust in recent years. Market capitalisation stood at <a href="https://www.asx.com.au/content/dam/asx/issuers/asx-investment-products-reports/2023/pdf/asx-investment-products-oct-2023.pdf">A$145.83 billion</a> in October 2023, up 13.55% since October 2022.</p>
<p>But before you dive in, remember that ETFs come with their own risks.</p>
<p>Carefully research and select ETFs that are aligned with your investment goals, preferences, time horizon and risk tolerance or see a professional for advice.</p>
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Read more:
<a href="https://theconversation.com/fintok-and-finfluencers-are-on-the-rise-3-tips-to-assess-if-their-advice-has-value-161406">FinTok and 'finfluencers' are on the rise: 3 tips to assess if their advice has value</a>
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<p class="fine-print"><em><span>Angelique Nadia Sweetman McInnes has received funding from the Accounting and Finance Association of Australia and New Zealand, Central Queensland University. She is a member of Accounting and Finance Association of Australia and New Zealand, the Financial Advice Association of Australia, the Society for Trusts and Estate Planning, the Financial Planning Academic Forum, Cooperative Research Australia, the Association of Computing Machinery, the Health Informatics Knowledge Management Steering Committee, and the Australasian Society for Computers in Learning in Tertiary Education.</span></em></p>Exchange-traded funds allow you to spread your risk across many different regions and markets (such as shares, bonds, property and companies). You aren’t putting all your eggs in one basket.Angelique Nadia Sweetman McInnes, Academic in Financial Planning, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1615352021-05-26T18:10:14Z2021-05-26T18:10:14ZAfrica’s free trade area offers great promise. But only if risks are managed with resolve<figure><img src="https://images.theconversation.com/files/402822/original/file-20210526-19-1j7v1s0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Citrus orchards in South Africa. Kenyans buying South African oranges pay a heavy price due to import duties.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>For all its stutters and missteps, there can be little argument that the <a href="https://europa.eu/european-union/index_en">European Union (EU)</a> has largely lived up to its ambitious billing: to create stability and growth on a continent that, for a period, was dangerously prone to nationalism and conflict.</p>
<p>The question facing Africa is whether the continent’s free trade area can likewise mitigate conflict and forge a prospering Africa.</p>
<p>The African Continental Free Trade Area is a project of the African Union (AU). Founded in 2018, it’s <a href="https://au.int/en/cfta">described</a> as a framework through which to deliver “inclusive and sustainable growth”. By July 2019, 54 of the AU’s 55 member states had signed the agreement, with Eritrea the only holdout. While negotiations are still ongoing, the trade agreement officially commenced on 1 January this year. The idea is that it will be rolled out over three phases.</p>
<p>The <a href="https://www.worldbank.org/en/topic/trade/publication/the-african-continental-free-trade-area">World Bank</a> imagines it as a means “to lift 30 million people out of extreme poverty”.</p>
<p>But will it?</p>
<p>The experience of the EU could help show the way both in terms of the upside, as well as potential pitfalls. </p>
<h2>Lessons and pitfalls</h2>
<p>In terms of success, the EU has contributed to the advancement of peace and reconciliation, democracy and human rights in Europe. It has also promoted economic convergence between its wealthier and poorer constituent parts. </p>
<p>When the EU was awarded the <a href="https://www.nobelprize.org/prizes/peace/2012/summary/">2012 Nobel Peace Prize</a> the committee argued that “through well-aimed efforts and by building up mutual confidence, historical enemies can become close partners”. It highlighted a number of achievements including the EU’s contribution to the introduction of democracy in Greece, Spain and Portugal, the strengthening of democracy in Eastern Europe and overcoming the division between East and West as well as ethnically based national conflicts. </p>
<p>In terms of pitfalls, the EU has seen its fair share of detractors and crises. </p>
<p>For example, questions were asked about its heavy-handed response <a href="https://theconversation.com/varoufakis-in-conversation-with-leading-academics-as-syriza-splinters-and-election-beckons-in-greece-35861">during the Greek debt crisis</a> and more recently about <a href="https://www.bbc.com/news/explainers-56286235">its response</a> to the Covid-19 pandemic. </p>
<p>But the EU has shown great resilience even in the face of losing one of its largest members, the UK, <a href="https://theconversation.com/brexit-deal-done-whats-in-it-and-where-next-for-the-uk-and-eu-152532">through Brexit</a>. </p>
<p>It’s easy to aspire to such integration without recognising the careful construction and staging of successively deeper integration that preceded the EU. Before becoming full members of the EU, candidate countries have had to meet strict criteria in terms of governance and economic conditions amongst other factors. Its exclusivity is part of the reason for its success.</p>
<h2>The promise</h2>
<p>The main objectives of Africa’s free trade area are to “to create a single continental market for goods and services, with free movement of businesspersons and investments”. Its remit is sweeping: from the reduction of tariffs among member countries to introducing regulatory measures such as sanitary standards and removing technical barriers to trade. </p>
<p>There are tantalising opportunities for the plucking. Currently, a massively underperforming Africa accounts for <a href="https://www.weforum.org/agenda/2021/02/afcfta-africa-free-trade-global-game-changer/">just 2% of global trade</a>. And only 17% of African exports are intended for other countries on the continent, well below <a href="https://www.weforum.org/agenda/2021/02/afcfta-africa-free-trade-global-game-changer/">intra-continental trade</a> in Asia (59%) and Europe (68%). </p>
<p>As the largest free trade area in the world when measured by number of participating countries, the potential for the African Continental Free Trade Area to nudge those numbers in the right direction is significant. </p>
<p>The United Nations Conference on Trade and Development (UNCTAD)<a href="https://unctad.org/system/files/official-document/presspb2018d4_en.pdf">suggests</a> that, if the trade pact is fully implemented, the GDP of most African countries could rise by 1% to 3% once all tariffs are removed. </p>
<p>The <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/34139/9781464815591.pdf">World Bank</a> estimates the pact will boost regional income by 7%, or $450 billion, speed up wage growth for women, and lift wages by 10.3% for unskilled workers and 9.8% for skilled workers.</p>
<h2>The caveats</h2>
<p>Some thorny issues still need to be thrashed out. These include bringing down existing tariffs. For example, oranges imported from South Africa for sale in a supermarket in Kenya currently attract a 25% tariff. Non-tariff barriers, such as <a href="https://www.tradebarriers.org/ntb/non_tariff_barriers">sanitory rules</a>, also need to be tackled. </p>
<p>Another unresolved issue is finding consensus over ‘<a href="https://unctad.org/es/node/2191">rules of origin’</a>. This requires getting agreement on what tariffs, if any, will apply to goods that one country buys cheaply in Asia, for example, and wishes to trade in Africa.</p>
<p>Vested interests often make it hard to deal with these issues. Again the example of the EU is instructive, as the clear benefits from membership seemingly outweigh costs. </p>
<p>Africa needs to overcome some other challenges too. </p>
<p>African countries <a href="http://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf">rate poorly</a> for ease of doing business. Only two – Mauritius and Rwanda – rank among the global top 50 countries in the <a href="https://www.doingbusiness.org/en/reports/global-reports/doing-business-2020">World Bank’s Doing Business 2020 report</a> where business can be conducted with ease. </p>
<p>Trying to implement a project of this nature among 54 countries with sometimes vastly disparate economies and infrastructure will stretch systems and patience. There are also challenges associated with marrying the free trade deal with existing regional agreements, as well as with bilateral trade agreements with non-African countries. </p>
<p>In the case of the EU, candidate countries had to implement various economic reforms as part of the price of membership.</p>
<h2>Risks and pitfalls</h2>
<p>There is the danger that this could be yet another bold African declaration that is stillborn or badly implemented. The fallout could mean that the continent simply reverts back to the status quo. But some countries could be hurt more than others. </p>
<p>There is also a danger that the deal results in winners and losers. It’s therefore important to accept from the outset that not all countries will benefit equally. Countries with larger manufacturing bases and more developed transport infrastructure and with more diversified economies are likely to benefit more. </p>
<p>If the agreement deepens inequality between countries, it could raise tensions, and potentially spark conflict. Here, lessons gleaned from the EU could help. Under its arrangement wealthier countries <a href="https://www.bbc.com/news/uk-politics-eu-referendum-36322484">support</a> poorer nations within the block through various transfers. </p>
<p>The difficulty in Africa is that it has countries at vastly disparate levels of development facing different challenges and so each step in the process is going to be highly contested. </p>
<p>One possible solution for down the line would be put in place a mechanism that offers both carrot and stick. This could be done, for example, through the establishment of a solidarity fund where future gains get “taxed” with a levy to redistribute between countries to promote convergence.</p>
<h2>Rewards</h2>
<p>In 1946, Winston Churchill espoused the notion of a “<a href="https://europa.eu/european-union/sites/default/files/docs/body/winston_churchill_en.pdf">United States of Europe</a>”, of the need to</p>
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<p>re-create the European family, or as much of it as we can, and to provide it with a structure under which it can dwell in peace, in safety and in freedom.</p>
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<p>That is the role the African Continental Free Trade Area can play for the continent. </p>
<p>To make it work, however, African leaders need to commit to a full implementation of the agreement. This will mean that they must avoid turning inward, and buy into the notion that a united and co-ordinated front presents opportunities for the continent as a whole.</p>
<p>They must also get buy-in from citizens. As the UK’s exit from the EU showed, people will want to opt out if they can’t feel – or understand – the benefits.</p>
<p>The free trade deal won’t solve all of Africa’s woes. But it does have the potential to increase economic participation and lift citizens out of poverty.</p><img src="https://counter.theconversation.com/content/161535/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Luiz does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The African Continental Free Trade Area is the largest in the world. The World Bank sees it as a means of lifting 30 million people out of extreme poverty. But will it?John Luiz, Professor of International Business Strategy & Emerging Markets at the University of Sussex and the Graduate School of Business, University of Cape Town, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1188142019-06-16T17:23:51Z2019-06-16T17:23:51ZSustainable finance: Canada risks being left behind in low-carbon economy<figure><img src="https://images.theconversation.com/files/279435/original/file-20190613-32317-16kzdxz.jpg?ixlib=rb-1.1.0&rect=81%2C135%2C5925%2C3872&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Global investors are already mobilizing capital to take advantage of investment opportunities in climate-smart infrastructure, emissions-reducing technology and updated electricity grids. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Earlier this spring, the most in-depth analysis to date on Canada’s changing climate provided clear evidence that <a href="https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/Climate-change/pdf/CCCR_FULLREPORT-EN-FINAL.pdf">Canada is warming twice as fast as the global average</a>. As we increasingly experience the physical impacts (flooding, extreme weather, forest fires), we will experience the financial impacts as well in the form of both increasing market risks and unprecedented investment opportunities.</p>
<p>For the financial sector, this is a pivotal moment where it can realign its structures to ensure global capital flows toward solutions that will protect Canada’s economy and our prosperity, more broadly. However, Canada’s financial community has yet to fully grasp the numerous challenges and opportunities that climate change presents for us in the transition to a low-carbon economy. </p>
<p>On June 14, <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html">an independent panel of experts</a> released recommendations on what Canada’s financial system needs to do to support this transition. The key message: we must <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html">empower our financial sector to design a made-in-Canada sustainable finance system</a> so that Canadian firms can compete successfully among their global peers over the long term.</p>
<p>In its simplest definition, sustainable finance means aligning all of our financial systems and services to promote long-term environmental sustainability and economic prosperity. That includes channelling investments toward climate solutions and managing climate-related financial risks. </p>
<p>Canada has the talent, resources and institutional muscle to define sustainable finance for our economy. We need to grow and harness that capacity now, if we want to captain our own ship through one of the most significant global economic transitions in history.</p>
<h2>Much to lose, but more to gain</h2>
<p>According to the Economist Intelligence Unit, <a href="https://eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf">a 2C global warming scenario will trigger global financial losses of roughly US$4.2 trillion</a>. With 6C of warming, those losses balloon to $13.8 trillion. That represents about 10 per cent of the global assets currently under management. </p>
<p>Losses at this scale will have wide-reaching implications for investors and the asset-management industry. Everyday people who are depending on investment income for their retirement will find themselves in dire straits. That includes every Canadian counting on the Canada Pension Plan.</p>
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<img alt="" src="https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Climate change is expected to trigger global financial losses in the trillions, but there are also opportunities for investment.</span>
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<p>On the flip side, <a href="https://newclimateeconomy.report/2018/executive-summary/">there is tremendous value — some $26 trillion worth — to be gained by shifting economies to avoid worst-case climate scenarios</a>. This represents massive and economy-wide investments in <a href="https://unfccc.int/news/ifc-sees-usd-34-trillion-climate-investment-opportunity-in-south-asia">climate-smart infrastructure</a>, <a href="https://www.edc.ca/en/blog/cleantech-canada-growing-global-markets.html">emissions-reducing technology</a>, <a href="https://www.nasdaq.com/article/clean-energy-and-smart-grid-infrastructure-industry-report-and-investment-case-cm1122346">updated electricity grids</a>, to name just a few examples. <a href="http://www.climateaction100.org/">Global investors are already mobilizing capital</a> to take advantage of these opportunities.</p>
<p>The question for Canada is: how do we attract global investment while, at the same time, protecting Canadian assets, investors and firms from risk? </p>
<p>In essence, this is what sustainable finance is about — harnessing our financial systems to help accelerate the activities, decisions and structures that will put Canadian industries and our economy ahead of the curve without ignoring the environment.</p>
<h2>We can’t afford to fall behind</h2>
<p>Other global players are already acting. <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en">The European Commission has spent the past two years mobilizing expertise</a> to build a financial system that supports sustainable growth. It has made significant progress in establishing disclosure rules for climate-related financial risk and creating unified definitions (a taxonomy) on what can be considered environmentally sustainable economic activity. </p>
<p>For example, this includes defining the labels and criteria for green financial products, which will, among other things, significantly shape the direction of <a href="https://www.climatebonds.net/2019/03/climate-bonds-launches-green-bonds-state-market-2018-report-london-annual-conference">the rapidly expanding green bond market</a>.</p>
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<a href="https://theconversation.com/green-bonds-are-taking-off-and-could-help-save-the-planet-89643">Green bonds are taking off – and could help save the planet</a>
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<p>The problem is these rules and definitions are being pioneered elsewhere and are unlikely to benefit Canada. They may even penalize us, because they are designed for economies significantly different from our own. </p>
<p>For example, there is a current gap, and huge opportunity, to <a href="https://www.theglobeandmail.com/business/commentary/article-clean-finance-needs-to-include-traditionally-dirty-industries/">pioneer financial mechanisms</a> and incentives could be created to expedite the sustainable transition of higher-emitting sectors like oil and gas and agriculture. </p>
<p>This requires our leadership. </p>
<p>If we allow others to direct the innovations in sustainable finance, we will find ourselves without the financial tools and structures that Canada’s resource-rich economy needs to determine its own path through a global transition.</p>
<p>The expert panel’s report is our wake-up call. It is time to catch up and get ourselves to the table. Our financial sector — and the broader ecosystem including our accountants, lawyers and actuaries — needs to start answering some big questions. </p>
<p>What does meaningful, responsible and consistent disclosure look like in a Canadian context? How do we create incentives and opportunities to draw in private capital to boost clean tech innovation across our economy and to invest in climate-resilient infrastructure? <a href="https://www.bloomberg.com/news/articles/2019-06-05/companies-make-progress-but-not-enough-gauging-climate-risk">How do we better assess risk and the value of assets through a climate-smart lens</a>?</p>
<p>We must, and we can, build the knowledge, understanding and capacity of our financial system to rise to these challenges. We can do this by investing in the research, education, professional training and the collaboration necessary to lift our current generation of professionals to the next level, while preparing an emerging generation to lead. </p>
<p>For those of us in the financial sector, this is about the future of our industry. For all Canadians, it’s about the future of our economy and well-being. Let’s get started now.</p><img src="https://counter.theconversation.com/content/118814/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr. Sean Cleary, CFA has previously received funding from SSHRC for finance research projects; although not specifically related to sustainable finance. He is a CFA charterholder and is a member of the CFA Society Toronto Advisory Council. </span></em></p><p class="fine-print"><em><span>Ryan Riordan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We need to equip Canada’s financial sector to steer us through a global economic transition on our own terms.Sean Cleary, BMO Professor of Finance, CFA, ICD.D, Queen's University, OntarioRyan Riordan, Associate Professor & Distinguished Professor of Finance, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/999062018-07-16T10:39:53Z2018-07-16T10:39:53ZTrade war could chill China’s growing investment in US economy<figure><img src="https://images.theconversation.com/files/227706/original/file-20180715-27042-fhkag9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. is the biggest destination for Chinese foreign investment.</span> <span class="attribution"><span class="source">Jason Lee/Pool Photo via AP</span></span></figcaption></figure><p>The U.S. and China are currently engaged in an <a href="https://www.brookings.edu/blog/unpacked/2018/07/12/unpacked-the-us-china-trade-war/">ever-escalating trade war</a> with no end in sight. While the focus of the dispute has centered on tariffs, the consequences <a href="https://www.independent.co.uk/news/business/analysis-and-features/trade-war-explained-tariffs-donald-trump-us-china-imports-exports-a8434626.html">are expected to spill</a> well beyond imports and exports to other aspects of the countries’ complex relationship. </p>
<p>One such area is what economists call foreign direct investment, in which companies invest in businesses in another country. The United States’ ability to draw investments from around the world has been a <a href="http://www.areadevelopment.com/LocationUSA/2017-US-inward-investment-guide/importance-of-FDI-to-US-economy.shtml">significant driver</a> of its economic growth. Indeed, the U.S. was the <a href="https://ofii.org/sites/default/files/FDIUS%202017.pdf">top destination</a> for foreign investment in 2016, as it usually is. </p>
<p>China’s investments in the U.S., however, remain relatively paltry, despite the country’s growing clout on the world stage. And while most have been small and low-profile, a few bigger deals have made headlines and even been blocked over “national security” concerns. </p>
<p><a href="https://scholar.google.com/citations?user=eubX-aYAAAAJ&hl=en&oi=ao">I research</a> the international political economy of China’s rise. Even though most Chinese investment in the U.S. has little to do with national security, I believe the current tense environment will put a chill on Chinese-American deals – with severe long-term consequences. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/227686/original/file-20180715-27027-7xzovp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tesla CEO Elon Musk greets new owners of his company’s Model S sedans in Beijing in 2014. China’s Tencent took a 5 percent stake in Tesla in 2017.</span>
<span class="attribution"><span class="source">AP Photo/Ng Han Guan</span></span>
</figcaption>
</figure>
<h2>A snapshot of China FDI in the US</h2>
<p>The reality is that the vast majority of the <a href="https://www.aei.org/wp-content/uploads/2018/01/Chinese-Investment-Jan-2018.pdf">232 investments</a> made by Chinese companies in the United States since 2005 have little to do with national security. </p>
<p>A typical example is <a href="https://www.theguardian.com/technology/2004/dec/08/business.china">Beijing-based Lenovo’s acquisition</a> of IBM’s personal computer business in 2004 for US$1.75 billion, which raised little fanfare or objection. Or consumer electronics company <a href="https://www.scmp.com/business/companies/article/2116486/chinas-haier-has-plan-help-continue-turnaround-ge-appliances">Haier’s purchase</a> of General Electric’s home appliance unit in 2016 for $5.6 billion, again without a fuss. </p>
<p>In more recent years, Chinese companies have taken stakes in some well-known Silicon Valley companies. For example, last year, Chinese tech and media investment firm Tencent <a href="https://www.reuters.com/article/us-snap-tencent-stake/chinas-tencent-takes-12-percent-stake-in-snap-as-shares-plunge-idUSKBN1D81G3">acquired</a> a 12 percent stake in the owner of the messaging app Snapchat and <a href="https://www.bloomberg.com/news/articles/2017-03-28/tencent-buys-1-8-billion-tesla-stake-ahead-of-musk-s-model-3">5 percent</a> of Elon Musk’s Tesla. Also in 2017, China’s sovereign wealth fund invested $100 million in room-sharing service Airbnb. </p>
<p>Overall, China remains a minor U.S. investor – and the data suggest the president’s <a href="https://abcnews.go.com/Politics/10-times-trump-attacked-china-trade-relations-us/story?id=46572567">rhetoric on the campaign trail</a> may have already had a disruptive impact. Last year, China <a href="https://www.aei.org/wp-content/uploads/2018/01/Chinese-Investment-Jan-2018.pdf">invested</a> $24 billion in the U.S., down from $54 billion in 2016, excluding deals under $100 million in size. </p>
<p><iframe id="pnI8Q" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/pnI8Q/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>While that’s a sharp rise from just $5 billion a decade ago, it’s barely a drop in the bucket for the U.S. economy. <a href="https://ofii.org/sites/default/files/FDIUS%202017.pdf">China’s cumulative investments</a> in 2016 made up less than 2 percent of all $3.7 trillion invested in the U.S., ranking it 11th, a fraction of the U.K.’s $598 billion and Canada’s $454 billion, the top sources of funding.</p>
<p>California and New York alone <a href="https://www.bloomberg.com/news/articles/2017-04-25/chinese-investment-creates-and-protects-u-s-jobs-rhodium-says">received</a> the lion’s share of China’s $171 billion in investments from 2005 to 2017, or 51 percent. All but 14 states have received at least one investment in the period. </p>
<p><iframe id="OSbMV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/OSbMV/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>By sector, the biggest chunk has gone into property investments – such as prime real estate in New York along Park Avenue – which tallied $26 billion, or 15 percent, in the period. Financial firms such as BlackRock took in the next largest share of 14 percent, while 13 percent went to technology businesses like IBM and Motorola. </p>
<h2>National security and politics</h2>
<p>Two of the reasons Chinese investment in the U.S. isn’t higher are national security and politics. A number of high-profile deals have rung alarm bells among U.S. officials and politicians and ended up getting killed as a result. </p>
<p>For example, in 2003, Hong Kong conglomerate Hutchison Whampoa <a href="https://www.wsj.com/articles/SB105168669140493600">withdrew</a> from a joint bid for fiber-optic carrier Global Crossing after the <a href="https://fas.org/sgp/crs/natsec/RL33388.pdf">Committee on Foreign Investment</a> opened an investigation of the deal as some defense officials grew concerned the company’s chairman was too close to Chinese government officials. </p>
<p>Two years later, China oil producer CNOOC <a href="https://www.wsj.com/articles/SB112295744495102393">dropped its effort</a> to buy U.S. rival Unocal for $18.5 billion. In this case, it was lawmakers in Congress who managed to scuttle the deal. CNOOC <a href="https://www.wsj.com/articles/SB112298888643902543">blamed</a> a “political environment.”</p>
<p>The Committee on Foreign Investment, <a href="https://fas.org/sgp/crs/natsec/RL33388.pdf">established</a> by President Gerald Ford in 1975, has the power to veto investments if they might damage U.S. national security. Proposed Chinese investments get reviewed more often than those from any other country. Though the launch of an investigation is often enough to stop a deal – as was the case with Hutchison – the committee has only vetoed five deals, four of which involved China. </p>
<p>One came in 2012, when <a href="https://www.nytimes.com/2012/09/29/us/politics/chinese-company-ordered-to-give-up-stake-in-wind-farms-near-navy-base.html">President Barack Obama cited the committee’s recommendation</a> as he ordered Ralls Corp., a U.S. company owned by Chinese nationals, to divest its interests in wind turbines being built close to a Navy military site in Oregon. It was the first time the power was used since 1990, when President George Bush blocked the sale of an American aircraft manufacturing company to a Chinese agency. </p>
<p>And last year, President Donald Trump <a href="https://www.reuters.com/article/us-lattice-m-a-canyonbridge-trump/trump-bars-chinese-backed-firm-from-buying-u-s-chipmaker-lattice-idUSKCN1BO2ME">prevented</a> Chinese investment firm Canyon Bridge Capital Partners from acquiring U.S. chipmaker Lattice Semiconductor. </p>
<p>And the president <a href="https://www.nytimes.com/2018/06/27/us/politics/cfius-expansion-trump.html">supports a bipartisan bill</a> in Congress that would grant the Committee on Foreign Investments even more power. </p>
<h2>FDI as foreign policy</h2>
<p>While China may not make up a significant portion of the U.S. total, its spending there makes up the <a href="https://www.aei.org/wp-content/uploads/2018/01/China-Tracker-Jan2018.pdf">largest share</a> of Chinese outbound FDI by country. </p>
<p>From 2005 to these days, China invested $171 billion of its $1.87 trillion in total foreign investment in the U.S. </p>
<p><a href="https://www.cambridge.org/core/journals/business-and-politics/article/dissuasive-effect-of-us-political-influence-on-chinese-fdi-during-the-going-global-policy-era/34345FFDB008BD612F7469857CBCA10C">My own research</a> into China’s investments shows that state-owned companies are very sensitive to the government’s foreign policy goals. An agency known as the <a href="https://www.bloomberg.com/news/videos/2018-04-12/sasac-s-xiao-on-soe-reform-china-soe-investment-in-u-s-video">State-owned Assets Supervision and Administration Commission</a> of the State Council coordinates all foreign investments by major Chinese businesses. </p>
<p>Any drop in investments to the U.S. will probably be compensated by more spending in other destinations, especially those countries that are part of the <a href="https://theconversation.com/us/topics/one-belt-one-road-33049">One Belt, One Road</a> initiative such as Australia, Singapore and Vietnam. </p>
<h2>Going forward</h2>
<p>And in fact, the current trade dispute between the U.S. and China will most likely lead to less Chinese investment as deals will encounter increased scrutiny and resistance. </p>
<p>The president has said he <a href="https://www.express.co.uk/news/world/986966/trump-news-trade-war-us-china-tariffs">launched</a> the trade war because Chinese companies <a href="https://www.wsj.com/articles/china-started-the-trade-war-not-trump-1521797401">have a track record</a> of “stealing” Western technology and not respecting intellectual property. Hence, the administration will likely block investments that look along these lines or threaten national security.</p>
<p>But politics will also play a role as members of Congress and others <a href="https://www.bbc.com/news/av/world-us-canada-42405458/trump-china-and-russia-rivals-in-new-era-of-competition">regard China</a> warily as a growing rival that must be confronted. One risk is that <a href="http://www.pewglobal.org/2013/07/18/chapter-3-attitudes-toward-china/">anti-China sentiment</a> in the U.S. increases and makes it harder for the country to use “soft power” via cultural and economic means to achieve its ends – which is preferable to hard power at the end of a bayonet. </p>
<p>It’s unfortunate because <a href="https://dash.harvard.edu/bitstream/handle/1/3450062/helpman_tradewars.pdf?sequence=4">years on international political economy research</a> suggest trade wars and discouraging investment <a href="http://www3.nccu.edu.tw/%7Elorenzo/Ikenberry%20Rise%20of%20China.pdf">are exactly the wrong ways</a> for the U.S. to deal with China’s rise. The U.S. can find other strategies to challenge any unfair trading or business practices without jeopardizing good economic relations, which <a href="https://www.cambridge.org/core/books/renegotiating-the-world-order/B0878F74F44B1F08F3C7535019FBAEE3">have always been</a> the best way to prevent clashes and even war among great powers. </p>
<p>Beyond that, deeper business ties lead to better relations and stronger economies. Economic interdependence raises the costs of direct confrontation, leading to a more peaceful international system.</p>
<p>What concerns me from the current trade war is that it could make geopolitical clashes between China and U.S. stronger and more frequent in the long run.</p><img src="https://counter.theconversation.com/content/99906/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Francisco Urdinez does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Chinese investment in the US has never been high, but the ongoing trade war could dampen it further, with significant long-term repercussions.Francisco Urdinez, Professor of International Political Economy, Universidad Católica de ChileLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/971162018-06-03T19:15:16Z2018-06-03T19:15:16ZThe academic world must take action for more responsible, sustainable finance<figure><img src="https://images.theconversation.com/files/220794/original/file-20180529-80623-vg61xe.jpg?ixlib=rb-1.1.0&rect=1%2C25%2C1196%2C714&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">European Commission vice-presidents Valdis Dombrovskis and Jyrki Katainen present new EC initiatives on sustainable finance in 2018. </span> <span class="attribution"><a class="source" href="https://ec.europa.eu/commission/news/capital-markets-union-2018-mar-08_en">Thierry Monasse/EC</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>While once considered a niche market for responsible investors, sustainable finance is today in a phase of expansion and acceleration. The best example is the recent announce of the European Commission around its action plan on <a href="https://ec.europa.eu/clima/news/sustainable-finance-commissions-action-plan-greener-and-cleaner-economy_en">sustainable finance</a>, based on the findings of the High-Level Expert Group (HLEG), at a conference with heads of state and high-level financiers, including French president Emmanuel Macron and former New York mayor Michael Bloomberg. The objective is clear and ambitious: around 180 billion euros of additional investments a year are needed to <a href="https://www.novethic.com/sustainable-finance/isr-rse/jour-de-gloire-pour-la-finance-durable-a-bruxelles-145632.html">achieve the EU’s 2030 targets</a> agreed in Paris, allowing a broad part of the EU budget (40%) “toward financing the transition to a low carbon and inclusive model, but also the remaining 60% towards not harming it”.</p>
<p>This announcement echoes and gives meaning to the numerous initiatives taken by certain financial players to transform their business model. And messages are not only coming from businesses, with the voices of political bodies and central banks also being heard. Just recently, the governor of the Bank of England, Mark Carney, called for the financial system to adapt quickly, smoothly and effectively to social needs and particularly to climate-change issues. The Banque de France, which has just announced a responsible investment charter, is committed to taking things even further than supporting green assets to actually <a href="https://www.novethic.com/sustainable-finance/isr-rse/the-central-banks-of-france-and-england-call-for-more-regulation-against-climate-change-145719.html">penalising climate-damaging ones</a> (“brown assets”). These messages and positions are part of strong ethical and sustainable investment policies already adopted by certain sovereign funds such as the Norges Bank Investment Management (Norwegian sovereign wealth fund).</p>
<h2>Sustainable finance goes mainstream</h2>
<p>As for private initiatives, these have been being structured for many years, primarily by asset managers and institutional investors. But acceleration and transformation are now common and bringing sustainable finance out of its niche to make it mainstream and unavoidable. French bank La Banque Postale recently announced plans to manage all its assets using socially responsible methods by 2020, <a href="http://www.investmenteurope.net/regions/france/lbpam-to-become-full-sri-manager-by-2020/">representing 220 billion euros</a>.</p>
<p>Blackrock, the largest investor in the world with its $6 trillion in assets under management, has just announced its intention to exclude firearms manufacturers and retailers where this activity represents more than 5% of their revenue, targeting <a href="https://www.reuters.com/article/us-usa-guns-blackrock/blackrock-to-offer-gun-free-investment-strategies-etfs-idUSKCN1HC21M">Walmart and Kroger point-blank</a>. No longer are activist shareholders content just to draw dividends, now demanding answers about the corporate strategy and the ethical and responsible position, even if it means divesting from certain companies. As is the case with Nordea Asset Management, which has just withdrawn all of its Facebook shares following the <a href="https://www.bloomberg.com/news/articles/2018-03-21/facebook-is-blacklisted-at-nordea-s-sustainable-investment-unit">Cambridge Analytica data scandal</a>.</p>
<p>Beyond climate change and ethical issues, the challenge lies in raising the moral standards of financial capitalism. The EU’s action plan on sustainable finance recommends getting the ‘finance river’ back on course so that it may serve society. This line of thinking is more aligned with the ideas of Hungarian intellectual Karl Polanyi, who explained in his book ‘The Great Transformation’ (1944) that society guides and is embedded within the economy, and therefore finance. Finance is a strategic tool for the benefit of the economy, which in turn works for the benefit of society. Social issues therefore must guide economic decisions and projects, with the aim of committed social planning.</p>
<h2>Putting social issues in the curriculum</h2>
<p>In June 2016, David Pitt-Watson, executive fellow at London Business School, published an opinion piece in the <em>Financial Times</em>, explaining that master’s in finance graduates need to learn the real role of finance, and that finance-degree programmes need to include society’s issues in the economic relations within their teaching. In order to train responsible financiers capable of meeting the new social challenges of tomorrow, universities and business schools need to reassess how they are teaching financial practices and show greater responsibility. This is vital if we are to avoid repeating the mistakes of the past and educating players who are completely disconnected from the issues of the real economy and incapable of grasping the consequences of their decisions on businesses, and thus the men and women who depend on them.</p>
<p>Even today, too few higher education establishments have committed their finance programmes to these issues, preferring rather to rely on quantitative and mathematical approaches, despite them having shown their limitations during the previous financial crises and failing to address the economic challenges of the future. Students in financial markets masters are now chosen for their abilities to produce and encode distributed algorithms for high frequency trading servers. The choice of their job is not based most of the time on passion or engagement, but mainly on the quest for financial success, only guarantee of credibility in their eyes.</p>
<p>But the culprits are first the academics. Their inability to call themselves into question, preferring teaching economic and financial theories that have generated crises rather than creating new innovative courses linked with the needs of economy and society, show that the academic community is also guilty of all the actors trained during the last 30 years and directly involved in all recent known crises. The academic world has the power to transform events in redefining its social mission, by responding to this highly ambitious EU action plan with the emergence of courses that match the expectations not only of businesses but, above all, society.</p><img src="https://counter.theconversation.com/content/97116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christophe Revelli est administrateur du Forum pour l'Investissement Responsable (FIR, French SIF).</span></em></p>Once a niche market, sustainable finance is now expanding and accelerating, yet too few universities have committed their finance programmes to these issues. The time has come for change.Christophe Revelli, Professeur de finance responsable et directeur du MSc Corporate and Sustainable Finance de Kedge Business School, Kedge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/914422018-02-09T17:03:31Z2018-02-09T17:03:31ZThe EU wants to fight climate change – so why is it spending billions on a gas pipeline?<figure><img src="https://images.theconversation.com/files/205470/original/file-20180208-180813-ifievy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:TAP_in_Albania.jpg">Albinfo/Wikipedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Over the past few years there has been <a href="https://www.enelgreenpower.com/media/news/d/2017/12/renewables-exponential-growth">exponential growth</a> in clean energy investment – while fossil fuel assets are increasingly considered to be <a href="https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf">risky</a>. Yet, on February 6, the European Investment Bank, the EU’s long-term lending institution, voted to provide a <a href="http://www.eib.org/infocentre/press/releases/all/2018/2018-030-eib-backs-eur-6-5-billion-energy-sme-transport-and-urban-investment">€1.5 billion loan</a> to the controversial Trans Adriatic Pipeline (TAP).</p>
<p>The TAP is the Western part of a larger Southern Gas Corridor proposal that would ultimately connect a large gas field in the Caspian Sea to Italy, crossing through Azerbaijan, Turkey, Greece and Albania. And while gas might be cleaner than coal, it’s still a fossil fuel. </p>
<p>So how does the EU’s support for this major project fit in with its supposed goal of addressing climate change?</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The proposed Trans Adriatic Pipeline will run nearly 900km from Greece to Italy.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Trans_Adriatic_Pipeline.png">Genti77 / wiki</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Influencing investors</h2>
<p>A key problem is the message this sends to the private sector, where renewable energy is increasingly seen as a good investment. Technologies once perceived as too risky and too expensive are now delivering worthwhile returns thanks to reduced costs and breakthroughs in energy storage. The price of electricity generated by solar, wind or hydro is now comparable with the national grid. Over the past decade, investor meetings have shifted from discussing whether the transition to a low carbon economy will start before 2050, to whether it will be completed in the same period. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"949194987337650176"}"></div></p>
<p>But there is still not enough money being spent on renewables. While clean energy investment in 2017 <a href="https://about.bnef.com/blog/runaway-53gw-solar-boom-in-china-pushed-global-clean-energy-investment-ahead-in-2017/">topped US$300 billion for the fourth year in a row</a>, this is far short of what is needed to unlock the technology revolution necessary to tackle climate change. There is clearly a gap between what is required and what is being delivered. </p>
<p>The private sector will continue to invest significant capital into energy projects over the next few decades, so one issue facing policy makers is how to influence investors away from fossil fuels and <a href="https://www.sciencedirect.com/science/article/pii/S0301421511005064">towards renewable projects</a>. To really scale up investment into renewable infrastructure, <a href="http://www.unepfi.org/fileadmin/documents/Investment-GradeClimateChangePolicy.pdf">long-term and stable policy is required</a> – which investors <a href="https://www.sciencedirect.com/science/article/pii/S0959652615006277">see as clearly lacking</a>. </p>
<p>By funding the Trans Adriatic Pipeline, the EU’s investment bank is hardly signalling to the private sector that governments are committed to a green energy transition. </p>
<h2>Risky business</h2>
<p>If Europe really was to follow through and successfully switch to green energy – and such a transition is partially underway – then the pipeline project may even represent a risk to public finances.</p>
<p>Studies on climate change point to the need for a greater sense of urgency and ambition and, to stay within its “carbon budget” under current agreed emissions targets, the EU needs to be <a href="http://www.foeeurope.org/sites/default/files/extractive_industries/2017/can_the_climate_afford_europes_gas_addiction_report_november2017.pdf">fossil fuel free by 2030</a>. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/HSKcvoBKYxc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>So any large oil and gas infrastructure projects with investment returns beyond 2030 are saddled with risk. In just a decade or two, super-cheap solar and wind power could mean that gas pipelines such as TAP would no longer make financial sense and would become worthless “<a href="https://www.carbontracker.org/terms/stranded-assets/">stranded assets</a>”. Yet TAP backers are touting economic benefits for countries such as <a href="http://www.oxfordeconomics.com/Media/Default/economic-impact/economic-impact-home/Economic-Impact-trans-Adriatic-Pipeline.pdf">Albania</a> extending to 2068 – well beyond the date when Europe must entirely ditch fossil fuels.</p>
<p>The EU’s official stance is to hail natural gas as a cleaner “bridge fuel” between coal and renewables. But <a href="http://science.sciencemag.org/content/343/6172/733.summary">high leakage rates</a> and the <a href="http://www.climatechange2013.org/images/uploads/WGIAR5_WGI-12Doc2b_FinalDraft_All.pdf">potent warming impact</a> of methane (the primary constituent of natural gas) means that the Southern Gas Corridor’s climate footprint may be <a href="https://bankwatch.org/publication/smoke-and-mirrors-why-the-climate-promises-of-the-southern-gas-corridor-don-t-add-up">as large, or larger, than equivalent coal</a>. Abundant natural gas is also highly likely to <a href="http://iopscience.iop.org/article/10.1088/1748-9326/9/9/094008/meta">delay the deployment of renewable technologies</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"952216497123835906"}"></div></p>
<p>For the first decade of this century Europe prided itself on leading the political debate on tackling climate change. Now, it appears to be losing its boldness. To drive through a new technology revolution, the public sector needs to lead from the front and take bold decisions about its energy strategy.</p>
<p>A gas pipeline is not a technology of the future. If California can release <a href="https://www.youtube.com/watch?v=HSKcvoBKYxc">YouTube videos</a> describing the importance of considering stranded assets during this energy transition, and New York City can announce plans to <a href="https://twitter.com/NYCMayor/status/952216497123835906">divest from fossil fuels</a>, then maybe it is time for the EU to turn off the TAP.</p><img src="https://counter.theconversation.com/content/91442/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aled Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The European Investment Bank’s funding of the Trans Adriatic Pipeline will harm the climate and makes little financial sense.Aled Jones, Professor & Director, Global Sustainability Institute, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/770722017-05-10T06:14:40Z2017-05-10T06:14:40ZThese three firms own corporate America<figure><img src="https://images.theconversation.com/files/168552/original/file-20170509-11015-1ydxdq8.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Big Three</span> </figcaption></figure><p>A fundamental change is underway in stock market investing, and the spin-off effects are poised to dramatically impact corporate America.</p>
<p>In the past, individuals and large institutions mostly invested in actively managed mutual funds, such as Fidelity, in which fund managers pick stocks with the aim of beating the market. But since the financial crisis of 2008, investors have <a href="http://www.cnbc.com/2017/04/17/a-seismic-shift-is-happening-and-billions-are-pouring-into-these-funds.html">shifted to index funds</a>, which replicate established stock indices, such as the S&P 500.</p>
<p>The magnitude of the change is astounding: from 2007 to 2016, actively managed funds have recorded outflows of roughly US$1,200 billion, while index funds had <a href="https://www.ici.org/pdf/2017_factbook.pdf">inflows of over US$1,400 billion</a>.</p>
<p>In the first quarter of 2017, index funds <a href="https://www.etftrends.com/2017/04/etfs-industry-enjoys-record-first-quarter-inflows/">brought in more than US$200 billion</a> – the highest quarterly value on record.</p>
<h2>Democratising the market?</h2>
<p>This shift, arguably the biggest investment swing in history, is due in large part to index funds’ much lower costs. </p>
<p>Actively managed funds analyse the market, and their managers are well paid for their labour. But the vast majority are <a href="https://www.ft.com/content/e139d940-977d-11e6-a1dc-bdf38d484582">not able to consistently beat the index</a>. </p>
<p>So why pay 1% to 2% in fees every year for active funds when index funds cost a tenth of that and deliver the same performance?</p>
<p>Some observers have lauded this development as the “<a href="https://www.wsj.com/articles/how-index-funds-democratize-investing-1483914571">democratisation of investing</a>”, because it has significantly lowered investor expenses. </p>
<p>But other impacts of this seismic shift are far from democratising. One crucial difference between the active fund and the index fund industries is that the former is fragmented, consisting of hundreds of different asset managers both small and large.</p>
<p>The fast-growing index sector, on the other hand, is highly concentrated. It is dominated by just three giant American asset managers: <a href="https://www.blackrock.com">BlackRock</a>, <a href="https://www.vanguard.com">Vanguard</a> and <a href="https://www.ssga.com">State Street</a> – what we call the Big Three.</p>
<p>Lower fees aside, the rise of index funds has entailed a massive concentration of corporate ownership. Together, BlackRock, Vanguard and State Street have nearly <a href="https://www.ft.com/content/657b243c-e492-11e6-9645-c9357a75844a">US$11 trillion in assets under management</a>. That’s more than all sovereign wealth funds combined and over three times the global hedge fund industry.</p>
<p>In a <a href="https://doi.org/10.1017/bap.2017.6">recently published paper</a>, our <a href="http://corpnet.uva.nl">CORPNET research project</a> comprehensively mapped the ownership of the Big Three. We found that the Big Three, taken together, have become the largest shareholder in 40% of all publicly listed firms in the United States.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=608&fit=crop&dpr=1 600w, https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=608&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=608&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=764&fit=crop&dpr=1 754w, https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=764&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/168441/original/file-20170508-20729-vi6sxj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=764&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure 1: Network of ownership by the Big Three in listed US firms. (See our paper for explanation of colours).</span>
<span class="attribution"><span class="source">Fichtner, Heemskerk & Garcia-Bernardo (2017)</span></span>
</figcaption>
</figure>
<p>In 2015, these 1,600 American firms had combined revenues of about US$9.1 trillion, a market capitalisation of more than US$17 trillion, and employed more than 23.5 million people.</p>
<p>In the S&P 500 – the benchmark index of America’s largest corporations – the situation is even more extreme. Together, the Big Three are the largest single shareholder in almost 90% of S&P 500 firms, including Apple, Microsoft, ExxonMobil, General Electric and Coca-Cola. This is the index in which most people invest.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=430&fit=crop&dpr=1 600w, https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=430&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=430&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=540&fit=crop&dpr=1 754w, https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=540&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/168444/original/file-20170508-20729-1mpgbeg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=540&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure 2: Statistics about the ownership of the Big Three in listed US firms.</span>
<span class="attribution"><span class="source">Fichtner, Heemskerk & Garcia-Bernardo (2017)</span></span>
</figcaption>
</figure>
<h2>The power of passive investors</h2>
<p>With corporate ownership comes shareholder power. <a href="https://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-index-investing-and-common-ownership-theories-eng-march.pdf">BlackRock recently argued</a> that legally it was not the “owner” of the shares it holds but rather acts as a kind of custodian for their investors.</p>
<p>That’s a technicality for lawyers to sort. What is undeniable is that the Big Three do exert the voting rights attached to these shares. Therefore, they have to be perceived as de facto owners by corporate executives. </p>
<p>These companies have, in fact, publicly declared that they seek to exert influence. <a href="https://www.bloomberg.com/news/articles/2015-03-04/vanguard-s-mcnabb-says-firm-is-not-passive-on-governance">William McNabb</a>, chairman and CEO of Vanguard, said in 2015 that, “In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth.”</p>
<p>When <a href="https://doi.org/10.1017/bap.2017.6">we analysed the voting behaviour</a> of the Big Three, we found that they coordinate it through centralised corporate governance departments. This requires significant efforts because technically the shares are held by many different individual funds.</p>
<p>Hence, just three companies wield an enormous potential power over corporate America. Interestingly, though, we found that the Big Three vote for management in about 90% of all votes at annual general meetings, while mostly voting against proposals sponsored by shareholders (such as calls for independent board chairmen).</p>
<p>One interpretation is that BlackRock, Vanguard and State Street are reluctant to exert their power over corporate America. Others question whether the Big Three really want this voting power, as they primarily <a href="https://ssrn.com/abstract=2359690">seek to minimise costs</a>.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/OYpCxXuF3M8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<h2>Corporate American monopoly</h2>
<p>What are the future consequences of the Big Three’s unprecedented common ownership position?</p>
<p>Research is still nascent, but some economists are already arguing that this concentration of shareholder power could have <a href="http://dx.doi.org/10.2139/ssrn.2427345">negative effects on competition</a>.</p>
<p>Over the past decade, numerous US industries have become dominated by only a handful of companies, from <a href="http://dx.doi.org/10.2139/ssrn.2427345">aviation</a> to <a href="http://dx.doi.org/10.2139/ssrn.2710252">banking</a>. The Big Three – seen together – are virtually always the largest shareholder in the few competitors that remain in these sectors.</p>
<p>This is the case for American Airlines, Delta, and United Continental, as it is for the banks JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. All of these corporations are part of the S&P 500, the index in which most people invest.</p>
<p>Their CEOs are likely well aware that the Big Three are their firm’s dominant shareholder and would take that into account when making decisions. So, arguably, airlines have less incentive to lower prices because doing so would reduce overall returns for the Big Three, their common owner.</p>
<p>In this way, the Big Three may be exerting a kind of emergent “structural power” over much of corporate America.</p>
<p>Whether or not they sought to, the Big Three have accumulated extraordinary shareholder power, and they continue to do so. Index funds are a business of scale, which means that at this point competitors will find it very difficult to gain market shares.</p>
<p>In many respects, the index fund boom is turning BlackRock, Vanguard and State Street into something resembling low-cost public utilities with a quasi-monopolistic position. Facing such a concentration of ownership and thus potential power, we can expect demands for increased regulatory scrutiny of corporate America’s new “<a href="https://ssrn.com/abstract=2699326">de facto permanent governing board</a>” to increase in coming years.</p><img src="https://counter.theconversation.com/content/77072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jan Fichtner receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).</span></em></p><p class="fine-print"><em><span>Eelke Heemskerk receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).He is affiliated with The Galan Group</span></em></p><p class="fine-print"><em><span>Javier Garcia-Bernardo receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).</span></em></p>Together, three asset managers now control shares in 40% of all publicly listed firms in the United States.Jan Fichtner, Postdoctoral Researcher in Political Science, University of AmsterdamEelke Heemskerk, Associate Professor Political Science , University of AmsterdamJavier Garcia-Bernardo, PhD Candidate, University of AmsterdamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/529292016-01-15T12:12:01Z2016-01-15T12:12:01ZPeople invest their money illogically – but trying to help them can make things worse<figure><img src="https://images.theconversation.com/files/108058/original/image-20160113-10417-mpu555.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We never learn</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=PuDOxO3Ey4SaiA6DTFTiXg&searchterm=bad%20investment&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=104369201">Minerva Studio</a></span></figcaption></figure><p>In a world where financial experts are frequently proven badly wrong, it is hardly surprising that many people take charge of saving for their retirements themselves. The realities of the financial world don’t make this easy, though. And neither does the peculiar psychology of investing – as research in which I have been involved helps to show. </p>
<p>One common way of saving for the future is investment funds, in which finance professionals pool together the savings of a large number of people and invest them in things like the stock market, bonds and foreign exchange. According to financial theory, the <a href="http://tmtfree.hd.free.fr/albums/files/TMTisFree/Documents/Economy/Reflections%20on%20the%20Efficient%20Market%20Hypothesis%20-%2030%20Years%20Later,%20%202005.%20B%20G%20Malkiel.pdf">best strategy</a> for choosing a fund is to pick the one with the lowest investment fees and stick with it for as long as possible. This follows from the <a href="http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp">efficient-markets hypothesis</a>, which says that financial markets are full of skilled professionals who try to make as much money as possible, so no easy opportunities to make above-average profits remain in the market for long. </p>
<p>Yet in practice, many investors choose funds that have performed well in the past, and chop and change between them – incurring new investment fees each time. The fund industry <a href="http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00232/abstract">actively encourages</a> such behaviour by prominently advertising its most successful funds.</p>
<p>Past performance might seem a logical criterion, but research <a href="http://www.seligson.fi/resource/carhart.pdf">shows it has</a> absolutely no bearing on future performance. On the other hand, the level of investment fees makes a substantial difference. Fees are charged as a percentage of the amount invested, ranging from around 0.05% to about 1.5% a year. These might seem like low amounts, but the differences in compounding can be dramatic. If you invested US$1,000 in the US stock market in 1970 without paying any investment fees, for example, by the end of 2015 you would have had US$108,968 (a 10.7% <a href="http://www.econ.yale.edu/%7Eshiller/data/ie_data.xls">average annual return</a>). If you had paid a 1% annual fee, the final investment amount would have been US$71,792 – a reduction of US$37,177. </p>
<h2>The regulatory conundrum</h2>
<p>The question for regulators is what to do about all the unhelpful marketing. In the UK, for example, there are already rules about how the fund companies can market their funds. All information about past performance has to show the ten-year performance, for instance, which stamped out the old trick of emphasising the performance period over which a fund had had its best run. Other marketing tricks are still legitimate, however, such as putting all the emphasis on your most successful funds while saying less about the laggards. </p>
<p>One option for regulators is to make the fund owners show the data on investment fees and past performance as an actual amount rather than a percentage. Previous research has <a href="http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2872995/">already shown</a> that large investors are more sensitive to fees if they are a financial amount, and make better investment choices as a result. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/108060/original/image-20160113-10409-1o1q2qe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">What to do about the little guy?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=jl0SQt9hRANpd29YHgpPlw&searchterm=small%20investor&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=342709367">Gajus</a></span>
</figcaption>
</figure>
<p>To develop this we carried out two experiments, each with 1,000 would-be investors. In each experiment, we asked half of the participants to play the part of a large investor and the remainder to play the part of a small investor. The large investors were given hypothetical portfolios of US$1m to invest, while the small investors were each given US$1,000. </p>
<p>In the first experiment, we asked them all to choose between two funds. One fund had a fee of 1% per annum and a past annual rate of return of 1%, while the other had a 1.5% fee and a 1.5% performance. But instead of giving everyone the information as percentages, half of the small investors and half of the large investors were given the fee information for the first year as a financial charge – US$10/$15 for the small investors, US$10,000/$15,000 for the large investors. In both cases we made clear this was for year one only, and would increase through compound interest in years to come. The rest of the small investors and large investors were given all the data as percentages. </p>
<p><strong>Experiment 1</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=119&fit=crop&dpr=1 600w, https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=119&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=119&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=150&fit=crop&dpr=1 754w, https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=150&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/108195/original/image-20160114-2352-1o4aquz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=150&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
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<p>The results showed that the large investors were more likely to choose a fund on the basis of the fees when the fees were expressed to them as an amount. But, as we had suspected, the small investors did the opposite. They virtually ignored the US$10/$15 charges, believing them to be “peanuts”. It didn’t matter that the charges were still significant in percentage terms, and would rise in years to come. </p>
<h2>And it gets worse …</h2>
<p>In the second experiment, the investors were given the same two funds to choose from, but this time we varied the way the past-performance data was presented while always listing the fees as percentages. Half the large and small investors were asked to choose between funds whose past performance had been US$10/$10,000 per annum and US$15/$15,000, while the other half were given the performance data as a percentage. The funds had clear disclaimers identical to the ones that appear in real life, saying that past performance makes no difference to future performance. </p>
<p><strong>Experiment 2</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=116&fit=crop&dpr=1 600w, https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=116&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=116&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=146&fit=crop&dpr=1 754w, https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=146&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/108197/original/image-20160114-2365-16tfzxr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=146&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The small investors did the same thing in this experiment, but now with a better result: they largely ignored the past returns of US$10 and US$15, and correctly chose the low-fee fund. Translating past returns into small currency amounts helped the small investors to finally ignore what they should have been ignoring in the first place. As a result, in this experiment they outperformed the larger investors overall. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/108059/original/image-20160113-10399-15r67nn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Yesterday’s gone, yesterday’s gone.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=Y4QWRNMSHHQWTNNGhn5vWQ&searchterm=past%20and%20future&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=63535978">Gunnar Pippel</a></span>
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<p>The conclusion? Large investors and small investors can value the same information differently, which makes it difficult to regulate them all in the same way. Not only that, the benefits to different investors vary depending on which variable you are talking about. In short, one apparently obvious way of improving the marketing information on investment funds may be more trouble than it’s worth. </p>
<p>Our experiments give an insight into the difficulties of regulating investment products in a landscape of complex products and ordinary humans. Economists tend to build models that treat us as hyper-rational consumers. If only it were true.</p><img src="https://counter.theconversation.com/content/52929/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Newall does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investors are encouraged to make bad financial decisions from the way that saving products are marketed. New research shows that fixing this is a can of ugly worms.Philip Newall, Pre-Doctoral Researcher in Behavioural Science, University of StirlingLicensed as Creative Commons – attribution, no derivatives.