How much money is lying around today without interest?

I am happy when it rains....

...because if I am not happy, it will still rain, said the legendary German comedian and writer Karl Valentin (1882-1948). He lived in a time full of geopolitical and economic challenges. With a shrug of his shoulders, Valentin recognized that we have to take life as it comes. If we do not, it will rain anyway.

This week, I spoke at the ARS Academy's Investment Fund Conference on “Geopolitical and Economic Challenges for the Investment Fund Industry.” The ARS Academy is Austria's largest, private professional seminar provider. The current newsletter is an excerpt from my keynote.

How much money is lying around today without interest?

Estimates for Austria and Germany range in total from over one trillion euros - that is, a thousand billion - to several trillion. The higher forecast certainly includes all the short-term money market and short-term bond funds in the investment fund industry. Over the last five years, this asset class has produced negative nominal returns as high value stability - in the sense of low fluctuations - simply had a price. Adjusted for purchasing power, short-term investments were only stable in the sense of daily devaluation. 

The performance difference to productive - i.e. cash flow producing - assets was enormous. The rise in real estate prices was and is an issue in all major cities around the world and investing in financial markets took center stage, especially during the Corona lockdowns - an unforeseen windfall for the investment industry. Did the industry take sufficient advantage of this opportunity? Probably not, because Corona triggered defensive reactions - completely understandable from the perspective of the time. 

High regulation in Europe

This state of affairs reinforces the power of existing institutions and allows for few new, innovative business models. One feature of emerging cryptocurrencies is their flourishment outside the regulatory walls. Younger generations are puzzled by the high regulatory hurdles they must clear in order to invest in funds or other securities. How tempting are the ten minutes from downloading the app to making their first trade on one of the crypto exchanges is evident.

Giving value retention a chance

The investment fund industry cannot solve all the challenges on its own, but it can certainly play a decisive role everywhere. The major economic challenge of zero interest rates coupled with high inflation is felt by all and is intuitively understood. 

Real estate is so popular because it is easy to grasp. A positive side effect is that property owners are virtually forced to build up an asset month by month via the loan repayment. Even if 80 percent of the condominium still belongs to the bank, the whole family already has the feeling of ownership - after all, they are living in the asset. 

Less complexity

Equity funds are quite different. Terms like beta, volatility, growth, value and large cap make the world of stocks more abstract and remove it from the magic of entrepreneurship. Few of us will become successful entrepreneurs. However, all of us can be passive co-owners of successful business models. We do not have the same influence as a single active owner but we get to enjoy the same economic success - via value growth and dividends. 

Yet, because the mutual fund industry's solutions were not heard (perhaps they were not sufficiently clearly articulated or simply not attractive enough?), new, simpler answers to the challenges appeared on the scene. 

Keep it simple

“Forget all complexity and invest in the index. That way you have the most successful companies in your portfolio and do not have to worry about anything. Oh yeah, it's also a lot cheaper than anything else the mutual fund industry offers you.”

This is how providers of passive investments in indices via the vehicle of the exchange-traded fund (ETF) formulate their thesis. There is a lot to reply to these arguments. However, the justified “but, but, but,” is no longer heard as simple, understandable and low cost ambitions captures ever more investors. Accordingly, the worldwide triumph of passive index ETFs. [1] 

Everything for everyone? What suits you?

Mutual funds cannot be everything to everyone. The ETF  houses know this. They have to be large enough to offer the investor the cost efficiencies. Active fund providers also need to know what they stand for, what their beliefs are and what they oppose. They cannot attract everyone and anyone as a customer. However, they need to reach those who are a good fit for them. 

So, what suits you? We would be happy to work with you to find out what suits you and your portfolio best.