Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

I spent two years working at one of Malaysia’s major government-linked investment companies (GLICs), building financial models for all sorts of businesses, from electric vehicles to real estate investment trusts (REITs) and senior living homes. I enjoyed the intellectual challenge of understanding new companies, sectors and countries, and was on track to manage my own portfolio in a few years. But through it all there was always a nagging question in my mind — is this what I want to do for the rest of my life? Is working in investments a meaningful career?

Meaning is very subjective but that doesn’t mean that we shouldn’t try to define it. To me, meaning is about how much good something does for the world. Others will have their own form of meaning and that is fine too.

Desirable projects and technological progress

Investing typically means moving money around to buy assets that are expected to generate financial returns. This can improve the efficiency of asset allocation across companies, sectors and countries. It incentivises companies to invest in projects that people want to see happen, and brings new technologies and industries into existence.

The main caveat to this is that mass decision-making is not always the most optimal for society, for people don’t always want what is good for them. It is debatable whether social media juggernauts like Facebook or Instagram have an overall positive or negative impact on society. But this train of thought leads down a dangerous slippery slope: if we don’t trust collective decisions, who do we entrust to make important decisions and allocations? History has taught us that harmful dictators are much more common than beneficial ones. To be beneficial, a dictator must be both smart and benevolent — a rare combination for those in power.

Helping poorer countries grow?

Investments seek growth, which provides higher financial returns. Theoretically, this tends to funnel spare capital from richer countries towards poorer countries that have more room to grow. This capital can help countries develop and improve their standard of living. This effect is diluted by the fact that many of the poorest countries have such unstable political landscapes or undeveloped capital markets that they are avoided completely by investors.

Indeed, the S&P 500 index, which tracks the stock prices of the 500 largest public companies in the US, has been one of the best performing indices over the past few decades, driven by the strong performances of tech heavyweights Apple, Microsoft, Amazon, Meta and Alphabet. The current economic domination of supersized global firms attracts a lot of investment, which enriches already well-off shareholders. This is compensated for slightly by the rise of passive investing, which makes it easier for the layman to invest in large companies. But by and large, it is still the classes with higher socio-economic positions who can do so.

Price is not value

The above “benefits” of investment assumes good faith in capitalism’s free market mechanism to price assets accurately according to their inherent value. This assumption is heavily flawed because price depends on demand and supply, that is, scarcity, which can be artificially manipulated (like with diamonds and oil), while value can be measured in any number of ways. One way to measure value is by impact on society. Investments seek to estimate future price, rather than value.

The disparity between price and value can be seen more clearly through examples. The price to hire an investment analyst is much higher than the price to hire a schoolteacher, although the schoolteacher arguably provides more benefit to society than the investment analyst.

Also consider the provision of public goods such as roads, rail and street lamps. The price of these goods is much higher than their benefit to any one individual, so no one is willing to pay that price for that good to be developed. It requires a separate entity (such as a government) to cough up the initial investment and assume the project risks, by paying for it through taxes collected from many individuals.

How many angels can dance on the head of a pin?

The backbone of investment analysis is building financial models to estimate future price. This is done by projecting all future cash flow and discounting it back to present value. The accuracy of the model greatly depends on the quality of assumptions, such as the number of products sold, market growth and inflation rate. The exercise requires rigorous math, accounting and logic. At the end, the model arrives at a targeted share price.

If your targeted share price is higher than the current market price, then you should buy shares in anticipation of share price appreciation. If it is lower, you can short the stock if your market allows it (shorts are highly limited in Malaysia as it is speculative).

Replicate this across myriad investment funds and we have many of our brightest minds building financial models on the same companies and betting against other valuations. Does it really matter whether the share price of Apple is US$126 or US$128 today? It might lead to marginal improvements in capital allocation to firms, but the societal benefits are miniscule in comparison to the resources that go into projecting a targeted share price. There are far better uses of talent and intelligence that can advance humankind further.

Effective altruism and financial security

Effective altruism is a philosophy that advocates for using evidence and reason to maximise benefit to others. That includes working in a high-paying job (even if the job itself has minimal societal benefit) and donating the proceeds to effective charities. But how many people actually enter finance for that purpose? Besides, unless you are a Wall Street banker making million-dollar bonuses, you are much more likely to be able to affect a greater change by working directly on a problem.

In a developing country like Malaysia, achieving financial security is also a major concern for many. This is a valid goal in itself, but for the smart and dedicated, this is still attainable through a wide range of paths. A career is a long time — it is worth careful consideration over what you want to do with the best decades of your life. Do you want to argue over how many angels can dance on the head of a pin, or help everyone to dance freely?

Dual mandates of Malaysian GLICs

Some of the largest Malaysian GLICs are the Employees Provident Fund (EPF, RM957 billion), Permodalan Nasional Bhd (PNB, RM323 billion), Kumpulan Wang Persaraan (KWAP, RM141 billion) and Khazanah Nasional Bhd (Khazanah, RM123 billion). EPF and KWAP are relatively straightforward retirement funds — maximising shareholders’ return, with limited appetite for high-risk investments. PNB also seeks to maximise returns, but has the added responsibility of attempting to increase bumiputera ownership of equity.

Khazanah is different because Malaysians do not have accounts in it from which they can make deposits and withdrawals. Its RM123 billion under management is split into the Commercial Fund and the Strategic Fund. The mandate of the Strategic Fund is to undertake strategic investments with long-term economic benefits for Malaysia, including holding strategic national assets. This allows for investments that look beyond financial returns by taking societal benefit into account.

An example could be funding climate change adaptation projects such as improving flood predictions and building flood barriers. The financial return is limited because the nature of the project is to decrease costs of climate change, but it is crucial to the long-term development and prosperity of Malaysia.

The highest return

In these cases, investments can have a deeper meaning because they also seek to improve lives. There are many forms of more “ethical” investing including impact investing, shareholder activism and the much-maligned ESG (environmental, social and governance) investing. These are positive trends that bode well for the future and sustainability of the investment industry. If one can advance investments in this direction, there can be broad and deep benefits for society.

It is a long, winding road with a prize that may or may not be there. But then again, many things worth pursuing are difficult to attain. This author has weighed the various considerations of how meaningful a career in investments can be and decided to take another path in sustainability. If I can play a small part in nudging our systems towards a greener future, I will consider that a success. I hope the bright minds of our nation, particularly those brimming with desire to do good, will consider what their best path forward is.


Justin Liew Jin Soong is a research associate at Sustainable Development Solutions Network Asia, Sunway University

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