Practical analysis for investment professionals
25 April 2018

Investing: Past, Present, and Future

Memes are simple ideas that sometimes take hold and change the world. A successful meme creates a viral pattern that is replicated over and over again. Each person in the cycle embraces and applies the meme as though it was their own.

Memes are more than ideas, they can become mandates for living.

Finance has undergone two major cycles of transformation under this principle over the last 100 years and a third more recently. In each, a piece of influential writing served as the catalyst or milestone in the origin and development of the revolutionary concept. Likewise, a related product or invention was introduced or evolved to become the idea’s main driver. On rare occasions, these developments happen almost simultaneously, though most ideas that become memes take time to mature before they reach their transformative tipping point.

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Diversify Thy Portfolio: 1924–1974

The invention of the first open-ended mutual fund in 1924 by Massachusetts Investors kickstarted the diversification era. Then, almost 30 years later, Harry Markowitz’s “Portfolio Selection” was published and became diversification’s seminal text.

Markowitz took a simple concept — “Don’t put all your eggs in one basket” — and demonstrated its mathematical truth.

In retrospect, this was no easy task: How could higher risk assets reduce overall portfolio risk? In itself, the concept is counterintuitive. But out of this simple idea, an entire fund management industry developed. While the mutual fund became its primary vehicle, a whole network of asset managers, platform providers, brokerages, advisers, and custodians emerged to offer investment products and services to meet the demands of clients, from the largest asset owners to the smallest retail investor.

And today everyone who can be called an investor owns some form of diversified portfolio.

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Control Thy Portfolio Expenses: 1975–1994

The second phase of modern finance commenced in 1975 with two connected developments: the invention of the index fund, the First Index Investment Trust, on 31 December 1975, by Jack Bogle and Vanguard Group, and the publication of “The Loser’s Game” by Charles Ellis in the July/August 1975 edition of the CFA Institute Financial Analysts Journal. These developments ignited a passive versus active debate that persists to this day.

A second invention, the exchange-traded fund (ETF), propelled this era into its second stage. State Street Global Investors introduced the S&P 500 SPDR in 1993. The first ETF, the S&P 500 SPDR, offered a low-cost way to invest in the most liquid and well-known US equity index.

Many other index funds followed, and today about $4 trillion in assets are held in ETFs. Indeed, by 2017, passive investments accounted for half of all equity assets. Now whether this obsession with controlling costs is ultimately serving investors is subject to debate, but here we are. No one said that a meme had to be perfect, it just has to go viral.

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Make Thy Portfolio Impactful: 1992–?

Though socially responsible investing (SRI) has been around for as long as portfolio diversification, its revolutionary effect on investing culture did not begin to take hold until the 1990s.

Three documents precipitated this transformation. The Cadbury Report in 1992 set out recommendations on how to arrange company boards and accounting systems to mitigate corporate governance risks and failures. The UN Principles of Responsible Investing (UNPRI), established in 2005, laid out guidelines for responsible investing and invited the formal participation of asset managers and asset owners. Then David Swensen’s “2014 Letter on Climate Change” called on investment managers to consider the carbon impact of their investments.

The rise and growing ubiquity of SRI is not the product of any single innovation but rather represents a reinvention of the entire industry. Consider this: Roughly 100 data analytics firms, among them Sustainalytics and MSCI, have sprung up in recent years to gather environmental, social, and governance (ESG) data on corporations and other investments.

In the meantime, hundreds of investment managers have embraced ESG for fear of being left behind. What the true impact the widespread adoption of these practices will have is yet to be determined. But the trickle of new ESG- or impact-related investment products, including mutual funds and ETFs, has become a flood.

In 2017, nine months after the Morningstar Sustainability Rating (MSR) was introduced, 26 large-cap core funds met the rating’s criteria and five were designated “intentional” sustainable/responsible funds.

Though we are still in the early innings, the game is no doubt underway.

The second aspect of the impactful meme is the behavioral component. Decades of research into behavioral finance has inspired new ideas about how we can adapt our investing processes to mitigate the heuristics and biases within each of us. These tools are more subtle than those above and range from target-date funds to “opt-out” features in 401(k)s.

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The Next Frontier?

So what about the institutions? How do we better serve the people we represent as fiduciaries?

Our recent investigations into asset owner governance at Marquette University highlight how organizations and the people they entrust, from the board level on down, can become more effective in their investing.

Will it be individuals, with the help of their advisers, who figure out ways to manage both sides of the balance sheet better? My friend, Tom Anderson, believes so. Will it be new forms of money and investments that the current cryptocurrency and blockchain wave suggests? Will it be meaningful and lasting applications of artificial intelligence (AI)? Will it be taking on the ills of financial illiteracy that are unfortunately holding back many people across the world from realizing financial and retirement security? However the current era in finance evolves, as investment professionals, asking ourselves these types of questions will help us help our clients.

The answers we come up with may not transform finance in the way that Ellis’s and Markowitz’s ideas did in past eras. But they may play a small part in pushing the industry forward and our clients towards a better future.

You can follow Christopher K. Merker, PhD, CFA, on Twitter at @MerkerChris.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Liyao Xie

About the Author(s)
Christopher K. Merker, PhD, CFA

Christopher K. Merker, PhD, CFA, is a director with Private Asset Management at Robert W. Baird & Co. He is also director of the sustainable finance and business program at Marquette University, and executive director of Fund Governance Analytics (FGA). He recently served on the CFA Institute ESG Working Group, responsible for leading the development of global ESG standards. He publishes the blog, Sustainable Finance, and is co-author of the book, The Trustee Governance Guide: The Five Imperatives of 21st Century Investing. Chris received his PhD from Marquette University and MBA from Thunderbird, School of Global Management.

2 thoughts on “Investing: Past, Present, and Future”

  1. James Donman says:

    I enjoyed the article.

    However, I can’t let this quote pass unchallenged…
    “The invention of the first open-ended mutual fund in 1924 by Massachusetts Investors kickstarted the diversification era”

    The CFA claims to be a global association, so it’s puzzling that you think collective investments offering diversification began or first became popular in the US.

    The investment company concept dates back to Europe in the late 1700s, when “a Dutch merchant and broker… invited subscriptions from investors… to provide an opportunity to diversify for small investors with limited means”. (Quote from The Origins of Mutual Funds by K. Geert Rouwenhorst).

    Actual successful investment companies, as we know them today, date to the 1860’s. The Foreign & Colonial Investment Trust, founded in 1868 and has just celebrated it’s 150th birthday, “was the first collective investment scheme in the world”. It’s original prospectus highlighted the benefits of diversification, promising “to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks”. (Quotes from Wikipedia pages for “Foreign & Colonial Investment Trust” and “Investment Trusts”).

    By the end of the 1880s investment companies were booming in Britain, with over 80 companies in existence. Diversification was one of the main selling points and was fully understood as a major benefit by the investing public.

    It would not surprise me to find even earlier examples. Diversification is not a modern concept.

  2. Thank you for the comment. I was referring to our modern understanding of diversification especially in the context of mass public ownership of equities, and how we, as the investing public, were driven to invest in diversified portfolios in their current form, and the impetus and mechanism thereof.

    I agree with your comment: diversification, as a principle of risk reduction, is much older. In fact I would go back even further to put a date on it. I tend to think of the Medici’s in Italy (1397) as being among the first to apply the technique of diversification successfully on a large commercial scale. In their case, the the problem they addressed was the difficulty and risk of moving and paying for commodities across the Mediterranean trade routes. Individually, both buyer and seller were at significant risk on any given transaction. However, through the the use of Banker Acceptances, the unique risk of any single transaction under the Law of Large Numbers was mitigated. Also, the Medici banker as transaction facilitator, could appropriately price, via the commission or spread on the transaction, to mitigate the potential loss on the transaction.

    A later – but still early – application of this technique was in the form of the world’s first joint-stock company, the Dutch East India Company (the Vereenigde Oost-Indische Compagnie, or simply, VOC). In this case the risk was the merchant vessel to the East Indies, a long and dangerous journey around the Cape of Good Hope. The failure rate of non-returning merchant vessels was something like 40%, but the profit from those that made it could be as high as four times the initial investment. The creation of the VOC allowed diversification on a massive scale across merchant vessels (as many as 5,000):

    “Before the establishment of the VOC in 1602, individual ships were funded by merchants as limited partnerships that ceased to exist when the ships returned.

    Merchants would invest in several ships at a time so that if one failed to return, they weren’t wiped out. The establishment of the VOC allowed hundreds of ships to be funded simultaneously by hundreds of investors to minimize risk.” (

    As a side-note, the VOC to this day, on an inflation adjusted-basis, is the largest, most successful and longest-running corporation in world history, even compared to the modern behemoths like Amazon and Berkshire Hathaway.

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