Financial Engines
NOBEL PRIZE-WINNING ECONOMIST FORESEES MORE TAILORED INVESTMENT PRODUCTS LIKE "S&P 500 Without The Tech"
LOS ANGELES, May 24, 2001 – William F. Sharpe, Nobel laureate and co-founder and chairman of Financial Engines, Inc., told an international gathering of investment professionals in Los Angeles Monday that he foresees new individualized investment products being created to meet the needs of the growing numbers of individual investors.
Investors will need a mix of traditional and new investments, as well as a mix between investments that appeal to a broad audience and those that fit very individual needs.
"I could see for instance a broad market index like the S&P 500, but without the tech stocks. That would be appropriate for a Silicon Valley worker whose income depends on the tech sector and should perhaps not own tech stocks at all," Sharpe said.
Sharpe is best known for the namesake "Sharpe Ratio" he developed to measure risk-adjusted returns on investments. He made his remarks at the annual meeting of the Association for Investment Management and Research, a global professional association of 50,000 financial analysts, fund managers and investment advisors from 100 countries.
"I could see that firms would maintain parts of investments and an investor could totally customize a portfolio. Investment firms would then be building investments like Dell builds computers," Sharpe said.
"The combined demographic forces of increasing life expectancy and lower population growth are driving the changes in how the individual invests," Sharpe said. "We are going to have fewer workers per retired person. Those retiring need to have the assets to support themselves," Sharpe said. With current trends, by 2050 the support ratio in North America will decline from today's 5 to 1 ratio down to 3 to 1, he said.
Sharpe added that individual investors are also making big decisions. "Managing retirement assets has shifted from the employer's pension plan to the employee's 401(k) and IRA," he said.
But according to Sharpe, just as the individual needs greater returns, expected returns are likely to be lower than in the long historic past. "We cannot expect risk premiums like we've seen over the very long run," he warns. The risk premium is the amount an investment earns above the risk-free rate on the US Treasury bill. He believes that it has shrunk as risk has decreased, in part because professionals and investors are getting better at dispersing risk through asset allocation as well as hedging with futures and options. "There are also more wealthy investors than there ever were and these investors are requiring less in return for investing in risky assets."
Most investors need to seek a premium over the risk-free rate in order to be able to have enough for retirement, he added.
Sharpe called on advisers to the individual investor to specifically address the needs of the individual.
"As advisers you need to help them by forecasting performance returns that reflect future possibilities not past patterns," Sharpe said.
The Association for Investment Management and Research is best known for its rigorous Chartered Financial Analyst credential program. Headquartered in Charlottesville, Va., with a regional office in Hong Kong and an office about to be opened in London, the Association for Investment Management and Research includes 101 member societies and chapters in 27 countries. More than 86,000 CFA candidates from 143 nations are preparing now to take the organization's CFA exam in the June 2001. Along with the CFA program, AIMR is globally renowned for its stringent professional conduct standards and for its industry-leading advocacy and standard-setting work encouraging full and fair disclosure of financial information for investors and analysts. More information is available at www.aimr.org or 804/951-5499.
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