I Read Academic Research So You Don't Have To: 10 Looming Issues

In the June 2008 issue of CFA Institute Conference Proceedings Quarterly are notes on a presentation given by William H. Donaldson, CFA, to CFA Institute members on what he sees as 10 issues that could wallop financial markets but that no one pays much attention to now. By definition, unanticipated events have the greatest effect on market performance; when people expect something to happen, they can incorporate that expectation into their evaluation of when to buy and when to sell. Donaldson is the founder of investment bank Donaldson, Lufkin & Jenrette (now owned by Credit Suisse). He also co-founded the Yale School of Management and served as chairman of the Securities and Exchange Commission from 2003 to 2005. He's as smart as the smart money gets, so mutual fund investors might be interested in what he has to say.

Some of the 10 issues that he discussed are oldies but goodies. One key issue on his list is a mutual fund affliction: short-termism. Mutual fund investors too often chase returns rather than live through a short-lived drawdown, even on what is market-related (like right now) rather than due to the portfolio manager's skill. Portfolio managers want to boost their annual bonuses, so they invest where they currently expect good numbers. Corporate managers, wanting to keep shareholders happy (as they should), emphasize short-term earnings per share gains rather than long-term investments and strategic planning that might make for happier shareholders in the long run. Donaldson argues that investors need to think about long-term performance for their own investments and from the companies that they invest in.

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