Taking the future into account

One response to “Taking the future into account”

1. 

   Tim MacDonald

   October 10, 2012

   Might Mr. Gray’s confusion be cleared up if we did a little thought experiment?

   Let’s take the Fund Manager out of the equation, hypothetically, and ask ourselves what the agreement would look like if a Pension fund made an equity investment directly into the means of production, partnering directly with business to recover principal and earn at least minimum threshold returns. in increments, over time, from an agreed split in the revenues to be generated in consequence of the investment to be made, with residual sharing thereafter in whatever additional revenues may be earned, as they may be earned, more or less forever (or at least to the limit of the economic useful life of the enterprise invested in).

   To avoid misunderstanding, let’s agree that the Pension fund would be acting through third party investment professionals contracted for their expertise in putting together investments that work (as is already the case, for example, in Real Estate, Real Assets and Infrastructure). That is to say, this thought experiment is not about in-sourcing or out-sourcing. It is just about the values that would come out of a direct agreement between a Pension, or other institutional investor acting as the custodian of other people’s money under a charter of trust, and the organizers of an enterprise for the creation of value in the commercial markets. We still need professionals.

   I think the agreement would not be a simple agreement on price. Instead, the Institution would want agreement on many points of value, some financial, others societal. The enterprise would, as well.

   So, in this experiment, a contract for investment directly into the means of production might address principal protection, programmed performance, threshold returns, constancy, transparency, alignment of interests, sustainability and social responsibility.

   The details, of course, would be custom-crafted to fit the charter of trust for the particular Institution, as a steward of the present and future financial security of its constituents. It may address, among other things, climate stability, resource stewardship, social mobility, financial integrity, global community and economic adaptability. These are all issues of increasing importance for both business and investors in a real economy that has already become truly global, in both scale a limit: a messy place where profit-seeking has to make accommodations for the political, social and other complex issues of being a person.

   Now, let’s re-introduce the Fund Manager, but not a Real Estate or Infrastructure Fund Manager. A Public Equities or Hedge Fund Manager. This manager will securitize the means of production, so that it can buy a securitized asset at a price, for resale, at a later time, or in another market, for another price. It’s a clean, clinical transaction. Mathematical, really. All the values, other than asset price, get pushed out. The investment is commoditized.

   This experiment shows us that it is only the Capital Markets whose “motives are only to drive profits”, and their profits are measured by a single point of value: the market clearing price for securitized assets.

   According to this experiment, allowed to deal direct, neither enterprise nor investment would be so clinically single-minded.

   So here’s the question for our next thought experiment: How do we reconcile the messy complexity of sustainability in the real world with the clinical cleanness of speculative trading on future movements in the market-clearing price for securitized assets in the commoditized environment of the Capital Markets?

   I wonder what Mr. Gray would have to say.

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